The benchmark Shanghai Composite opened 0.38 percent higher at 4,316.57 and in less than an hour it climbed to an intraday high of 4,431.85 before tumbling to 4,290.81.

An investor monitos the stock price movements at a brokerage in Jinan, East China's Shandong Province August 1, 2007. [newsphoto]

That brief drop prompted many bargain-hunters into buying, which in turn drove up prices. The index finished at 4,407.73 points, an increase of 2.49 percent over the previous close.

The Shenzhen Composite Index which covers the smaller Shenzhen Stock Exchange rose 4.12 percent to 1,293.14 points.

Financial, property and steel shares drove up the market. Ningbo Bank led the banking shares with an 8.47 percent growth to 30.6 yuan per share, followed by Shenzhen Development Bank which rose 7.68 percent to 37.7 yuan.

The Industrial and Commercial Bank of China, the country's biggest lender, increased 0.90 percent to 5.58 yuan, while Bank of China went up 0.38 percent to 5.31 yuan.

In the real estate sector, China Vanke, the country's largest publicly traded property developers, jumped its daily limit of 10 percent, along with 15 other counterparts.

Among steel shares, Wuhan Steel rose 4.89 percent to close at 13.09 yuan per share after it announced a deal to buy a 48.41 percent stake in Kunming Iron and Steel Co. Ltd. Angang New steel soared 7.78 percent to 24.79 yuan.

The market is expected to experience wilder fluctuations in the next few days, as profit taking could be heavy after the market hits record highs, analysts said.

However, the upward trend will continue. Oriental Securities cited robust economic growth, strong corporate earnings, an ample supply of money brought about by the widening trade surplus, and steady appreciation of the Chinese currency for the rise in the index.