China's stocks plunged by the most in three weeks after central bank Governor Zhou Xiaochuan said shares may be overvalued and he doesn't rule out raising interest rates.

A woman looks at stock prices on an electronic board in Beijing June 5,2007. [Reuters]

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"Zhou's remarks are damping sentiment," said Fan Dizhao, who helps manage $1.8 billion at Guotai Asset Management Co. in Shanghai. "Investors may be selling for fear of further policies that will discourage speculation."

Panzhihua New Steel & Vanadium Co. and Bright Dairy & Food Co. were among about 60 stocks that dropped by the 10 percent daily limit.

The CSI 300 Index fell 173.84, or 4.3 percent, to close at 3877.59, its lowest since June 8. The measure, which posted the biggest fluctuation among markets included in global benchmarks, earlier rose as much as 1.4 percent.

A tripling of the tax on share trading last month led to the benchmark tumbling as much as 22 percent in five days. It took less than two weeks to recover from the rout.

"We're not sure whether there's a clear bubble but we worry" that shares are priced too high compared with earnings, Zhou told reporters in Basel, Switzerland, where he attended a meeting of central bankers over the weekend.

"We don't rule out further rate increases if necessary," and inflation remains a concern, Zhou said.

Panzhihua New Steel, the world's third-biggest maker of railroad track steel, plunged 1.12 yuan to 9.32. Bright Dairy, a Chinese partner of Groupe Danone SA, fell 1.13 yuan or 10.18.

Citic Securities, China's biggest publicly traded brokerage, lost 2.96 yuan, or 3 percent, to 55.29. Shanghai International Airport Co., operator of China's second-busiest airfield, fell 2.57 yuan, or 6.5 percent, to 37.22.

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