HK stocks drop to lowest in 4 months

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The blue-chip Hang Seng Index dropped about 840 points, or 3.8 percent, to close at 21,174.77--its worst close since March.

Financials were hit particularly hard as investors feared U.S. problems would spillover to Asia despite a government-backed plan to aid mortgage financiers Fannie Mae and Freddie Mac. Adding to the unease, traders were spooked by rumors that mainland China's government may be holding Fannie and Freddie bonds, analysts said.

While the market could make some upward moves, that could be quickly followed by selling, analysts said.

"We have to bear in mind the big trend is still heading downwards," said Linus Yip, a strategist at First Shanghai Securities. "The fundamentals are getting worse."

Investors dumped shares across the board, with financials leading the declines.

China's biggest lender, ICBC, dove more 4.3 percent to HK$5.3. China Construction Bank lost 4.5 percent to HK$6.2

HSBC fell more than 3 percent to HK$113, while Heavyweight China Life Insurance slid 5.3 percent to HK$27.

In other stocks, refiner China Petroleum & Chemical Corp., or Sinopec, lost 3.7 percent to HK$7.02. Aluminum Corp. of China, known as Chalco, was also badly hit, losing 7.6 percent to HK$8.27.

Retail goods and textile exporter Li & Fung tanked 5.8 percent to HK$21.8