LONDON: China's main share index fell by the most since 2008 after authorities cracked down on margin trading, where investors borrow cash to buy shares.
The securities regulator punished top brokerages for illegal activities in their margin business, which had fuelled previous rallies.
The brokerages were banned from opening new margin trading accounts for three months, according to media reports.
The Shanghai Composite fell 7.7% or 260 points to close at 3,115.09.
At one point, the index had fallen by more than 8% during the afternoon trading session, with banking stocks among the worst-hit.
What is margin trading?
It is a high-risk investing strategy that can produce big profits or big losses
Investors use their own money for a portion of their stock purchase
The remainder is borrowed from a broker
It allows investors to make bigger bets or buy more stock than they can normally
The broker charges interest on the loan, which can lead to debts if the investor's stock bet goes wrong
In China, margin trading has grown more than 10-fold in the past two years to a record 1.1tn yuan
The fall comes ahead of key economic data due from China on Tuesday.
China is set to release gross domestic product figures, which are expected to show that it has missed its annual growth target for the first time in 15 years.
Meanwhile, figures released on Sunday showed that new home prices fell significantly in December, the fourth month in a row prices have dropped.
In Hong Kong, the benchmark Hang Seng index fell 1.5% to close at 23,738.49.
Rest of Asia higher
Japanese shares were higher as investors hoped for more stimulus from the European Central Bank's policy meeting later this week.
The benchmark Nikkei 225 closed up 0.9% at 17,014.29.
However, shares in Sharp sank 9% to their lowest level since December 2012 after the tech company said it was likely to miss this year's earnings target.
Australian shares were higher, with the benchmark S&P/ASX 200 closing up 0.2% at 5,309.1.
A private survey indicated that inflation in Australia slowed to its slowest pace in two-and-a-half years in December as fuel prices fell.
The annual pace slowed sharply to 1.5% from 2.2% in November, which was the lowest reading since July 2012, according to the TD Securities-Melbourne Institute's survey.
In South Korea, shares were also higher, with the benchmark Kopsi index ending up 0.8% at 1,902.62.
Figures showed that producer prices in December fell by their fastest annual pace for 19 months because of slumping oil prices.
The producer price index fell 2% from a year earlier, marking the sharpest annual decline since May 2013.