SHANGHAI shares plunged the most in three weeks yesterday, sending the key index south for a fourth straight day, after China's top auditor announced it will carry out a nationwide audit of government debt.

Market sentiment was also hit by dismal weekend data showing industrial profits in China rose at a slower pace in June while a continuous rise in borrowing costs reignited fears over a liquidity squeeze.

The key Shanghai Composite Index dropped 1.7 percent, the biggest daily loss since July 8, to close the day at 1,976.3 points.

The National Audit Office said on Sunday that it will launch a nationwide audit of government debt at the request of the State Council, China's cabinet, fueling concern over rising debt levels that may pose a risk to growth in the world's second largest economy.

"The audit campaign will hit market expectations over economic growth and trigger new uncertainties that will reduce investor appetite for risks and add to pressure on the A-share market," Guotai Junan Securities said in a report yesterday.

Market performance was also depressed by data from the National Bureau of Statistics on Saturday showing the combined profits of China's industrial companies rose 6.3 percent from a year earlier in June, lower than an annual gain of 15.5 percent in May and 9.5 percent in April.

Industrial profits rose 11.1 percent in the first six months of the year, down from a 12.3 percent growth in the January to May period, the bureau said.

"The modest easing in industry profit growth comes with the on-going sluggish manufacturing environment," Zhu Haibin, chief economist for China at JPMorgan, said in a note. "Indeed, the weakness in manufacturing investment has been a major drag on economic growth in recent months."

Rising borrowing costs that pointed to a tighter liquidity situation was another dampener on the market. The seven-day repurchase rate, a gauge of liquidity strain among banks, increased for an eighth consecutive day in Shanghai yesterday, adding 70.60 basis points to 5.06 percent.

Lenders paced the decline in financial firms. Industrial Bank Co lost 2.2 percent to 9.13 yuan. China Minsheng Banking Corp fell 3 percent to 8.15 yuan.

CSSC Jiangnan Heavy Industry Co, one of China State Shipbuilding Corp's affiliated shipyards, slumped 9.7 percent to 9.02 yuan after reporting a 60.31 million yuan net loss in the first half of the year.