The country's stock market on Tuesday suffered its steepest daily fall in the past decade, with the benchmark Shanghai Composite Index plunging nearly 9 percent to close at 2,771.

On Monday, the Shanghai index gained 1.4 percent to 3,040.60, extending a spate of record high closes.

The Shenzhen Composite Index sank 8.54 percent yesterday to 709.81.

Partly in reaction to the mainland plunge, Hong Kong's blue chip Hang Seng Index fell 360 points, or 1.8 percent.

Wall Street fell sharply in early trading yesterday, joining a global stock decline on growing concerns about slowing economy in the US.

Former Federal Reserve Chairman Alan Greenspan warned on Monday that the US economy may be headed for a recession.

The Dow Jones industrials was down more than 120 points, or nearly 1 per cent.

European markets were also rattled in afternoon trading. Britain's FTSE 100 was down 2.28 percent, Germany's DAX index was down 2.44 percent, and France's CAC-40 was down 2.87 percent.

But the fall in the Chinese market was caused not by any bad figures, or gloomy forecast. While some analysts cited pressure for profit taking as the major reason, others said the loss of about 800 billion yuan ($102 billion) in market capitalization was primarily triggered by a rumor about capital gains tax.

Well-renowned economist Wu Jinglian, a senior fellow with the Development Research Center of the State Council, has long called for collection of such a tax.

China Daily had no way to confirm that the government may be planning to levy a capital gains tax on investors but none of the government agencies has officially declared it was just a rumor either.

The government does not usually issue an official statement about something it was not doing or planning to do, according to Li Zhenning, president of Shanghai Rising Fund Management Co. He predicted that the market would pick up after one or two days.

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