China's stocks saw their biggest drop in two weeks yesterday, amid fears of a possible domestic interest rate hike.

The Shanghai Composite Index, the mainland's main stock index, fell 1.97 percent to close at 2,906.334 after hitting a low of 2868.807 points.

The latest consumer price index (CPI) figures are believed to have triggered a new round of speculation on a possible domestic interest rate rise in the near future.

China's CPI rose 2.7 percent in February on the same month last year, up from 2.2 percent in January.

The acceleration of loan growth to 17.2 percent in February, from 16 percent in January, and money supply growth to 17.8 percent on the previous year from 15.9 percent in January, also exerted pressure on the central bank to further tighten monetary policy, including via an interest rate hike.

Ma Jun, chief economist of Deutsche Bank Greater China, said the central bank would increase the interest rate by 27 basis points in the next four to six weeks.

Speculation of a possible tightening of monetary policy heightened investors' already fragile sentiment, which had just recovered from a recent market correction that saw an 8.84 percent dive on February 28.

However, analysts said an interest rate hike had already largely been factored in to prices.

"It is natural for the market to see corrections after the index gains for six straight days," said Zhang Qi, an analyst with Haitong Securities.

Hong Kong shares yesterday were down sharply at the close, as stock markets in the region tumbled on fears of a possible fallout from housing market woes troubling the US economy.

The Hang Seng Index lost 496.21 points on yesterday's close, finishing at 18,836.93 points. The turnover was HK$51.64 billion.

The Hong Kong stock market, hurt by the US and the mainland markets, has fallen continuously in recent weeks, slipping back from a high point of around 21,000 points at the start of the year.

"We should not panic about this seemingly sharp drop. The turnover of HK$51.64 billion is still pretty good and we haven't seen investors withdrawing their bids in huge volumes," said Castor Pang, a strategist at Sun Hung Kai Financial Group.

(For more biz stories, please visit Industry Updates)