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By Chikako Mogi and Wayne Cole
TOKYO/SYDNEY (Reuters) - Asian markets buckled badly on Thursday after the Federal Reserve heralded an eventual end to free money and China turned the screw on credit even as factory activity in the world's second-largest economy hit a nine-month low.
Shares, currencies and commodities all crumbled as investors rushed to unwind trades in emerging markets. Central banks across the region were busy intervening in foreign exchange markets trying to put out spot fires, but with only limited success.
Among a host of unwanted milestones: Asian stocks outside Japan suffered their biggest daily loss since late 2011, key lending rates in China reached historic highs and India's currency carved out a new record low.
"Kaboom is a better word to describe the market," was the judgement of a trader at an overseas bank in Manila.
MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> sank nearly 4 percent, marking its biggest daily percentage fall since September 2011.
The falls took the index's year-to-date loss to more than 9 percent, much of it suffered in recent weeks as fears of the Fed tapering back its massive stimulus program and further signs of economic weakness in China prompted hefty withdrawals of cheap money from emerging markets.
Among the biggest decliners was China, where the CSI300 <.CSI300> of the leading Shanghai and Shenzhen A-shares listings closed down 3.3 percent.
In Indonesia, the Jakarta Composite Index <.JKSE> slumped 3.7 percent as worries about the inflationary impact of a move to raise fuel prices further added to selling pressures, while Indian shares <.BSESN> slumped nearly 3 percent.
Most other bourses in the region lost more than 2 percent, including Australia <.AXJO>, Hong Kong <.HSI>, Singapore <.FTSTI>, and South Korea <.KS11>.
Japan's Nikkei stock average <.N225> was off 1.7 percent, a relatively modest move given its recent wild swings, while Taiwan stocks <.TWII lost 1.4 percent. <.T>
The stress was clear in Asian credit markets, where the spread on the iTraxx Asia ex-Japan investment-grade index <ITAIG5Y=MG> widened 23 basis points, reflecting the rising cost of hedging against debt default.
The initial catalyst for the carnage was Fed Chairman Ben Bernanke, who pulled few punches by signaling a likely end to asset buying by the middle of 2014.
That sent 10-year U.S. Treasury yields spiraling to a 15-month peak of 2.38 percent, squeezing investors who had borrowed in U.S. dollars to invest in emerging markets.
"Bernanke was more explicit than markets had expected. Rising U.S. yields will spur broad dollar buying. The dollar's direction is now set," said Yuji Saito, director of foreign exchange at Credit Agricole in Tokyo.
He said the contrast between Fed's shrinking balance sheet and the Bank of Japan's rapidly expanding holdings would spark the dollar to resume its climb against the yen.
Indeed, the dollar was already up at as much 98.28 yen, and was last trading at 97.97.
Adding to the pain, a closely-watched measure of Chinese manufacturing took a surprise spill and only added to evidence of tepid economic growth in the second quarter.
The "flash" HSBC China Purchasing Managers' Index contracted further to 48.3 in June, from May's final reading of 49.2, its weakest reading since September.
Hardly helping was a surge in interbank lending rates as the People's Bank of China (PBOC) tightened liquidity even as banks there clamored for cash.
"That hardline stance suits the recent government policy of clamping down on non-essential businesses by financial institutions, such as shadow banking, wealth management, trust operations and even arbitrage," said a trader at a major Chinese state-owned bank in Shanghai.
The Australian dollar cratered to as low as $0.9164, reflecting China's importance as the resource-rich country's single biggest export market.
The Philippine peso lost 1.3 percent to 43.80 per dollar, its weakest since May 25 last year, while South Korea's won fell 1.4 percent to 1,145.9.
India's rupee hit an all-time low of 59.9850 to the U.S. dollar, prompting intervention to stem the rot, traders said.
Elsewhere, dealers also suspected central banks in Malaysia, Indonesia and the Philippines may have stepped in to curb strong downward pressure on their currencies.
"If you put the Chinese numbers together with the policy statements from both, what's clear to me is that the emerging market currencies, particularly with a commodity bias, will continue to go down," said Mark Matthews, head of Asia research at Julius Baer.
Expectations for further falls appeared to be reflected in a Reuters poll showing short positions in the Indonesian rupiah and the Malaysian ringgit have risen to the highest levels in more than four years as investor sentiment toward emerging Asian currencies soured.
DEVELOPED MARKETS OVER EMERGING
Matthews did see a glint of hope on the horizon should the Fed's confidence in the U.S. economy prove prescient.
"If we are moving towards a more normalized environment, people need to remember that it's a good thing the U.S. economy is growing," he said.
"The world we've got accustomed to in the last 10 years of crisis and central bank intervention is metamorphosing into one of growth and less central bank intervention."
However, that also meant developed markets would likely outperform emerging markets for the foreseeable future.
In a rare turn, Japan was one of the developed nations that seemed to be doing better. A Reuters survey of manufacturers out Thursday showed confidence at its highest since early 2011, and that followed surprisingly upbeat news on exports.
The resource-poor nation is also set to benefit from lower global commodity prices. U.S. crude futures were down $2.10 a barrel at $96.14 a barrel while Brent fell $2.12 to $104.00. <O/R>
U.S. gold futures for August delivery fell more than 6 percent to $1,290.05 an ounce in Asia on Thursday. Spot gold was trading at $1,290.16 an ounce. <GOL/>
(This report replaces separate market reports from Hong Kong, mainland China, South Korea and Taiwan).
(Additional reporting by Asia Bureaus; Editing by Eric Meijer & Kim Coghill)