China shares fall on US economic worries

The benchmark Shanghai Composite Index fell 3.43 percent to close at 2,779.45. The Shenzhen Composite Index for China's smaller second market shed 3.22 percent to close at 843.23.

Major companies in a range of Chinese industries declined, but the drop was sharpest for real estate developers, banks and insurers.

"Investors are worried about China's economic conditions over the next year. Investors' confidence was also hit by the deteriorating conditions of the overseas economies," said Zhang Yang, an analyst for Oriental Securities.

Poly Real Estate Group fell by the maximum daily limit of 10 percent. The country's biggest developer, China Vanke Ltd., shed 7.17 percent.

Among financial companies, China Life Insurance Co. and Ping An Insurance Co. both fell 6 percent. Midsize lender Pudong Development Bank Ltd. dropped 7.1 percent.

Investors were spooked by Hong Kong's decline and rumors that the Chinese government had invested in bonds issued by troubled U.S. mortgage lenders Fannie Mae and Freddie Mac, said Xu Zhiyuan, an analyst for Capital Edge Investment and Management.

"The fundamentals of the real estate stocks were still not good, so it is no surprise to see them going down. The banking stocks were affected by them," Xu said.

In other industries, the country's biggest fixed-line phone company, China Telecom Ltd., fell 5.29 percent, while China Mobile Ltd. lost 3.81 percent.

The government is due to release closely watched inflation data Thursday, which could add to pressure for an interest rate hike. Analysts expect a decline from May's 7.7 percent inflation but expect the rate to stay above the government's 4.8 percent target for the year.