The benchmark Shanghai Composite Index slipped 3.7 percent at 2,668.11, the sharpest single-day drop since a 4.8 percent slump on July 13, 2006. The smaller Shenzhen Composite Index fell 2 percent to 599.80.
Analysts were divided over whether the declines that ended the week signaled a correction or just a breather in the market's torrid rise. The main Shanghai index more than doubled last year and hit a record high as recently as Wednesday.
"The market seems to have exhausted its short-term gaining momentum," said Shi Honglin, an analyst at Everbright Securities. "It's in need of correction to squeeze out the bubbles."
In a research note issued this week, investment house Morgan Stanley dubbed Chinese banks and insurers as being "among the biggest equity bubbles in the financial world currently."
But Peng Yunliang, a senior analyst at Shanghai Securities disagreed.
"Since the beginning of January, the index has soared. It's very natural for investors to take profits," Peng said. "I don't think their selling means they are losing confidence."
Among the biggest losers, China Petroleum & Chemical, Asia's top refiner by capacity, plunged 7.3 percent to 9.59 yuan. The company hit an intraday record of 11.39 yuan Wednesday and has since moved lower.
Other blue chips also tumbled as traders expecting a near-term correction retreated to the sidelines.
Shanghai International Port (Group) was down 7.2 percent at 7.38 yuan, Daqin Railway plunged 6.4 percent to 8.28 yuan and China Yangtze Power dropped 6 percent to 9.57 yuan.
Index heavyweights Industrial & Commercial Bank of China and Bank of China extended losses from the day before. ICBC fell 3.3 percent to 5.33 yuan and BOC declined 4.1 percent to 4.73 yuan. Both had lost nearly 5 over the past two days.
In a research note issued this week, JP Morgan put the price target for ICBC at 4.80 yuan and that for BOC at 4.50 yuan.
(See also page 11)
