Chinese shares tumbled 3.80 percent by the break on Tuesday, extending the previous day's hefty losses as dealers fret over a liquidity crisis in the country's banking system that has squeezed lenders.
The benchmark Shanghai Composite Index dived 74.56 points to 1,888.68, following a 5.30 percent dive on Monday.
Investors have been spooked as cash dries up and the interbank rate -- the interest banks charge to lend to each other -- has jumped, raising fears they will cut back on loans, which would in turn drag on the economy.
The central People's Bank of China added to those worries on Monday when it ruled out providing any fresh cash to bolster markets and ordered banks to get their own houses in order.
"We are likely to see the stock market under more downward pressure if the central bank doesn't make any policy stance, explicitly or implicitly," Minsheng Securities analyst Zhang Lei said.
However, despite the growing discomfort the seven-day repurchase agreement rate -- a benchmark for interbank borrowing costs -- fell to 6.50 percent from Monday's close of 7.53 percent. It is also well down from the 11.62 percent seen on Thursday.
Banking stocks fell across the board.
China Minsheng Bank tumbled 9.87 percent to 7.67 yuan, Industrial Bank lost 5.69 percent to 13.10 yuan and China Merchants Bank dropped 4.94 percent to 10.39 yuan.
-- Dow Jones Newswires contributed to this story --