Hong Kong shares suffered their worst day in more than two months on Monday, led by a 5 percent slump in Europe's largest bank HSBC Holdings, on growing worries about Spain's ability to stave off a sovereign bailout.

The Hang Seng Index had closed above its 200-day moving average on Friday before news broke that Spain's heavily indebted Valencia region asked for financial aid, a move that sparked a spike in Spanish bond yields.

But on Monday, the benchmark slipped back below that level and closed down 3 percent at 19,053.5, underperforming Asian peers and wiping out last week's gains.

This is just above support at the 50 percent Fibonacci retracement of its rise from October lows to February highs, at about 18,977.3. Monday's loss was the Hang Seng Index's worst performance since May 16, when it lost 3.2 percent.

In onshore Chinese markets, the Shanghai Composite Index closed down 1.3 percent at its lowest since March 2009. The CSI300 Index of the top Shanghai and Shenzhen listings ended down 1.3 percent at its lowest since Jan. 16.

Markets are playing catch up after we overshot on Friday. Some investors are also taking some profits on some of last week's top performers, said Jackson Wong, vice-president of equity sales at Tanrich Securities.

HSBC Holdings crashed to its worst day since Nov. 10 last year, down 5.7 percent after its London listing dropped 3 percent on Friday. HSBC lost $8.6 billion in market value in Hong Kong on Monday.

The bank was reportedly among a number that U.S. prosecutors and European regulators are investigating for allegedly colluding to manipulate global benchmark interest rates.

CHINA NON-BANK FINANCIALS HAMMERED

Chinese shares were also hit by comments over the weekend from an adviser to the People's Bank of China (PBOC) that third-quarter growth in the world's second-largest economy could slow to 7.4 percent.

That compared with the 7.6 percent official second-quarter GDP growth.

The HSBC China July flash PMI is expected to be released at 0230 GMT on Tuesday. Investors will be looking for signs of stabilisation in the slowdown of the world's second-largest economy.

On Monday, Shanghai bourse volume slipped below its 20-day moving average for the first time in four sessions as money supply stayed tight in the mainland, while Hong Kong turnover rose to the highest since June 15.

Part of that spike in Hong Kong was down to Carlyle Group's $720 million sale of a stake in China Pacific Insurance (Group) Co Ltd (CPIC) .

Shares of China's third-largest insurer slumped 10 percent from Friday's close to HK$24.20, not once trading at or above the HK$25.50 price at which Carlyle sold 229 million shares. CPIC lost 2.2 percent in Shanghai.

Weakness in CPIC infected the Chinese insurance sector broadly after strong gains last week. China Life Insurance tumbled 4.8 percent from a 4-1/2-month high in Hong Kong and shed 1.8 percent in Shanghai.

Ping An Insurance shaved 4.4 percent from Friday's more than 2-month high in Hong Kong, and it lost 2.6 percent in Shanghai.

Other Chinese non-bank financials also underperformed. CITIC Securities slumped 7.3 percent in Hong Kong and 4.1 percent in Shanghai, with investors punishing the Chinese brokerage for its poor first half earnings on Friday.

At a time the onshore markets are performing poorly, investors did not take too well to CITIC's $310.3 million purchase for a near-20 percent stake in French bank Credit Agricole's CLSA brokerage unit, with an option to buy the rest, underscoring the global ambitions of China's biggest listed brokerage.

The Shanghai Composite Index is now down 2.6 percent in 2012 to date, while the CSI300 Index is up 0.8 percent - both down more than 10 percent from May highs.