Banks drag China stock index down 4.5 pct

SHANGHAI, Sept 16 - China's main stock index sank over 4 percent on Tuesday as banking shares tumbled in response to the bankruptcy of Lehman Brothers <LEH.N> and an easing of Chinese monetary policy which may pressure banks' profit margins.

The Shanghai Composite Index <.SSEC> ended down 4.47 percent at a 21-month closing low of 1,986.636 points, not far from the day's low of 1,974.388.

That brought it below the 2,000-point level which many analysts and investors see as important support. It is down 68 percent from last October's record peak.

Although many analysts believe a surprise monetary easing announced by China's central bank on Monday was intended to support the stock market, lending rates were cut while deposit rates were kept unchanged, which threatens to shrink banks' interest rate spreads.

"Some investors interpret the central bank's move as a sign that China's economy is worsening, and the easing was negative for banking shares," said Gao Lingzhi, strategist at Great Wall Securities.

"More powerful measures are needed to boost confidence in the stock market."

If a clean break below the 2,000-point level is confirmed by a second straight daily close, the index may head for technical support on its 2004 peak of 1,783 points, some analysts believe. ($1 = 6.83 yuan)