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.