Chinese shares dropped for the first time in three days on Tuesday, as 90 percent of stocks retreated on profit taking and following heavy sell-offs overnight on Wall Street.

Analysts said the decline came as investors locked in profits after a two-day rally and as the huge loss overnight on Wall Street hit recovering confidence.

The Dow Jones industrial average tumbled 3.27 percent overnight on worries about the details of the U.S. 700 billion U.S. dollar bailout plan and rocketing crude oil prices.

The Shanghai Composite Index closed down 34.90 points, or 1.56 percent, at 2,201.51, after it surged 18 percent over the last two days in response to measures to shore up investor confidence.

To stem market declines, the government scrapped stamp tax on stock purchases and let its investment arm buy shares of three major Chinese lenders on the secondary market. It was also planning to make it easier for listed companies to buy back their stocks.

The Shenzhen Component Index plunged 406.99 points, or 5.45 percent, to 7,062.08.

Turnover on the two bourses was 107.88 billion yuan (15.8 billion U.S. dollars), down from 160.24 billion yuan on Monday. Losses outnumbered gains by 763-63 in Shanghai and 660-30 in Shenzhen.

Banks, except the Industrial and Commercial Bank of China, slid after jumping by the daily limit of 10 percent for two days. China Merchants Bank slipped 5.10 percent to 17.13 yuan. China Citic Bank was down 6.67 percent to 5.04 yuan.

Securities firms gained modestly as a bigger turnover on regaining confidence could boost their earnings. Citic Securities added 2.44 percent to 20.15 yuan.

PetroChina, the most heavy-weight stock in the key Shanghai index, gained 3.87 percent to 12.61 yuan. The parent, China National Petroleum Corp. (CNPC) announced Monday it had purchased 60 million of its A shares in Shanghai.

Inner Mongolia Yili Industrial Group Co. plunged by the daily limit as investors dumped its shares on lingering concerns over the contaminated milk scandal, in which at least four babies have died, would hurt its earnings.

(Xinhua News Agency September 23, 2008)