Hong Kong stocks crashed to a 26-month low yesterday as panic selling erupted after weeks of sustained losses on the local bourse and an overnight plunge in New York. The key Hang Seng index slumped 1,438.31 points to 9,059.89 in a record points fall, closing just off its lows but taking its losses for the month to 40 per cent and prompting dealers to forecast further drops.

Markets across the region joined the panic selling, with many posting their biggest falls since the 1987 crash.

????ING Barings Securities sales director James Osborn said he could see no end to the vicious circle of declines, adding Hong Kong and other regional markets would take their leads today from Wall Street. "With Asian markets falling and weakness on Wall Street, people are questioning equities in general," he said.

The crisis was triggered when Hong Kong authorities jacked up interest rates to stave off speculators targetting the local currency and its peg to the US dollar.

Officials say the defence was successful but dealers yesterday warned that speculators, who have been blamed for devastating currencies across south east Asia since the July float of the Thai baht, were likely to return to the volatile market.

Yesterday's crash, which took the index down 37.5 per cent from the beginning of the month, was "mainly due to Wall Street, probably not much else," said Mr David Liu, of Schroders Investment Management, adding it was difficult to say how much further the bourse might fall. "We need to see more stability first," he said.

Hong Kong's chief executive, Mr Tung Chee-hwa, responded to the crisis by reaffirming his administration's commitment to maintaining the local currency's peg to the US dollar and said the territory's economic fundamentals remained sound.

"The peg, or linked exchange rate, is staying ... this is not a subject for discussion," a smiling Tung told reporters as the market collapsed."The fundamentals here are very good, the economy is going well in Hong Kong."

The Stock Exchange of Hong Kong said it was closely monitoring developments and urged investors to be "guided by the economic fundamentals rather than short term market movements."