The Shanghai Composite Index sank 3.43 percent to close at 2779.448 points, near its intra-day low of 2769.914. Turnover in Shanghai A shares rose to a fairly active 75 billion yuan ($11.15 billion) from Monday's 59.3 billion.

Money and credit growth moderated in June, while the pace of foreign reserve accumulation slowed dramatically, the central bank announced on Monday. Annual growth in yuan lending fell to its slowest pace in over a year.

"The June data shows economic activity is slowing and people are more reluctant to invest," said Li Xianming, strategist at Ping An Securities. "This puts pressure on the market, at a time when sentiment was already very weak."

Banks slumped yesterday in response to the June lending data, and also in reaction to bigger drops of mainland bank shares in Hong Kong. Industrial and Commercial Bank of China fell 3.37 percent to 4.88 yuan.

HK shares drop

Hong Kong shares slid 3.8 percent to their lowest close in nearly four months yesterday, as investors hit the panic button amid concern over further fallout from the credit crisis and mainland banks' possible exposure to troubled US mortgage lenders.

HSBC Holdings, the most heavily traded stock of the day, dropped more than 3 percent as worries about the US banking sector after Friday's collapse of IndyMac outweighed optimism over a government plan to support mortgage finance companies Fannie Mae and Freddie Mac.

The nearly 5 percent drop in the stock over the previous two sessions wiped off more than $9 billion in market capitalization.

"Sentiment is really fragile," said Louis Wong, research director with Phillip Securities in Hong Kong. "Investors are worried that there might be more bank failures, especially small banks in the United States. Whenever you have this kind of financial turmoil, banking stocks get hit," he said.

The Hang Seng Index closed 839.69 points lower at 21174.77, shedding all the gains made in last week's 3.6 percent rally. Mainboard turnover rose to HK$65.8 billion from HK$58.4 billion on Monday.

Shares in bourse operator Hong Kong Exchanges & Clearing reflected the increased anxiety, plunging 7.1 percent after they hit their HK$115 resistance level on Monday.