Hong Kong is braced for one of its toughest weeks in years, with the prominent Peregrine Investment Bank on its knees, the stock market staggering and interest rates moving relentlessly higher.

Share prices fell 9.16% when the market opened on Monday, with the blue chip Hang Seng index sharply lower at 8,080.10.

It continued to fall, sinking 11.08%, or 985.51 points, to 7,909.13 by midday.

"Red chip" shares of China-backed, Hong Kong-based companies shed more than 24% while H-shares, or stocks of companies incorporated in China, lost 18%.

Traders call the numbers

Shares eventually fell to their lowest point for almost three years and closed below the 8,000 barrier.

The government has called for calm as the economic crisis that has battered Asia for months showed little sign of abating.

The BBC's Matt Frei reports (Dur: 1-35)

Officials at Peregrine announced that the bank has lodged an application with the authorities to go out of business. The bank - the largest of its kind outside Japan - has been burdened by debts estimated at $400 million.

Zurich Centre Investments Ltd, a unit of insurer and financial services company Zurich Group, provoked a crisis at Peregrine on Friday by pulling out of a deal to inject US$200 million into the company.

Peregrine held crucial talks with potential investors and its bankers over the weekend to try to secure urgent funding, but local newspapers reported on Monday that the rescue talks had collapsed late the previous night.

Stehen Brown, a market analyst in Hong Kong, tells the BBC why Peregrine is in trouble (Dur: 2-25)

The company cannot now guarantee staff their pay and is in default in the United States.

Hong Kong's Financial Secretary Donald Tsang said: "I hope the market's reaction will be rational.

"There are bumps ahead but by sound financial controls we will be able to cope. It will be a tough few weeks ahead," he predicted.

On Friday, Hong Kong stocks fell 3.89%, taking the blue chip Hang Seng index to its lowest close in two and a half years at 8,894.64.

A trader in Tokyo contemplates the figures

After the close, major banks increased prime rates by 75 basis points, higher than expected, to 10.25%.

Tokyo was offering little support on Monday, with the Nikkei 225 index already off more than 1% in early trading at 14,840.76.

In Indonesia, the rupiah weakened again despite the presence of a delegation from the International Monetary Fund which is discussing tough economic reforms with President Suharto.

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