Analysts say stock market fundamentals are still strong

The benchmark Shanghai Composite Index fell nearly 9%, its worst daily performance since February 1997.

The fall comes amid rumours of a crackdown on illegal share offerings and trading, as well as fears about accelerating inflation.

The drop triggered falls in other markets across Asia and Europe.

In Hong Kong the Hang Seng index closed down 1.8%, while in Japan the Nikkei 225 index slid 0.5%.

Markets in London, Frankfurt and Paris also opened sharply down with leading mining stocks - whose performance is influenced by the state of the Chinese economy - under pressure.

Substance or speculation?

Chinese markets have been performing strongly on the back of the country's stellar economic growth, and the Shanghai Composite Index closed above the 3,000 mark for the first time on Monday.

Indeed, some commentators have said that the day's slump was itself the product of speculative pressures, and that economic fundamentals remained strong.

This kind of terrifying fall means the market has become abnormal Chen Huiqin, Huatai Securities

Even so, shares tumbled 268.81 points to 2,771.791 on Tuesday after leading institutional investors chose to take profits amid suggestions the market may have peaked.

Few companies were immune to the wave of selling, with banking and metals stocks particularly weak.

Industrial & Commercial Bank of China, China's largest bank, slumped 8% while steel producer Baoshan dropped by 10%.

The sell-off was also precipitated by market talk about imminent interest rate rises after recent data showed a sharp rise in consumer prices.

Political factors also weighed on the market movements with speculation about government plans for tax reform and rural expenditure.

Greater caution

Analysts were divided over whether the fall was the start of broader trend but most agreed that leading investors had become more cautious.

"This kind of terrifying fall means the market has become abnormal," said Chen Huiqin, from Huatai Securities.

Shares fell in Hong Kong and other markets

The BBC's Quentin Sommerville in Shanghai said investing in shares had become increasingly popular at all levels of Chinese society and the government was worried that it would be blamed should the market suffer a prolonged slump.

The market sell-off immediately rippled through other Asian markets, which have all enjoyed a strong start to the year.