Banking stocks in the region suffered steep losses yesterday amid concerns that recent fundraising in the Japanese sector could spread to China.

In Hong Kong, Bank of China dropped 4 per cent to HK$4.62 after saying it was examining “various options” to replenish capital after advancing more loans in the first nine months of the year than any other Chinese lender.

According to reports, China's banking regulator wants big state lenders to raise their capital adequacy ratios.

China Construction Bank fell 3.4 per cent to HK$7.15 while Industrial and Commercial Bank of China shed 1.7 per cent to HK$6.85.

The Hang Seng index fell 1.5 per cent to 22,423.14, its biggest one-day drop in three weeks. Shanghai fared even more poorly as it suffered its worst daily decline for three months.

The composite index retreated 3.5 per cent from Monday's 3½-month peak as turnover reached its highest for four months.

The index of dollar- denominated B-shares tumbled 7.3 per cent as investors booked profits from a 26 per cent surge this month.

There were rumours that the authorities might merge B shares into a planned international board for foreign companies listing in Shanghai.

There was no respite for the Japanese market as traders returned from Monday's holiday.

The Nikkei 225 Average, which last week recorded a fourth successive weekly decline, shed another 1 per cent to end at a four-month low of 9,401.58.

Concerns about shareholder dilution in the banking sector continued to weigh heavily on the market following leading lender Mitsubishi UFJ Group's record fundraising announcement last week.

Analysts said Japan's second- and third-largest banks, Mizuho Financial and Sumitomo Mitsui Financial, were likely to follow MUFG's lead, sending their shares down 2.5 per cent to Y154 and 4.4 per cent to Y2,690, respectively. MUFG shares fell a further 2.8 per cent to Y458.