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Asian markets took Wall Street's overnight lead and plunged in trading Wednesday, as a wave of short selling hit Hong Kong, where the Hang Seng dropped its most in one day since Sept. 11, 2001.

The Hang Seng plummeted 1,386 points, or 5.4%, to 24,450. China's Shanghai Composite Index tumbled 153 points, or 2.8%, to 5290, and the Nikkei dropped to a 26-month low of 468 points, or 3.4%, to 13,504.

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"What's bad on the Hang Seng is the dip below last November low of 25,862 points," says Andrew To, head of research and sales at Taifook Securities in Hong Kong. "The final support level to keep the market from extreme bearishness now is 23,400 -- that level can be taken as the dividing line between a bull and a bear market."

Other dealers said that the new support level for the Hang Seng was 24,200, and below that, 22,380. They pointed out that there was aggressive short selling activity by hedge funds, in particular in

Hong Kong Exchanges

(HKXCF)

, which dived 7%, to HK$172.

Other big victims of the sell-off were

China Life Insurance

(LFC) - Get China Life Insurance Co. Ltd. Report

, which lost 7.6%, to HK$33.45,

PetroChina

(PTR) - Get PetroChina Co. Ltd. Report

, down 6.14%, to HK$11.92, and

TheStreet Recommends

Cathay Pacific

(CPCAY)

, off 5.3%, to HK$18.60.

China Life Insurance is now down more than 20% since the beginning of the year. PetroChina suffered as crude oil declined 1%, to $90.09 a barrel by the end of the Asian trading session, while a large Japanese hedge fund was reportedly selling Cathay Pacific heavily.

Among property stocks, increasing speculation in Hong Kong that the

Federal Reserve

may cut interest rates early couldn't hold back profit taking, as the stocks have recently been hitting all-time highs. Conglomerate

Hutchison

(HUWHY)

slipped 4.2%, to HK$79.40, and

Cheung Kong

(CHEUY)

fell further, down 4.8%, to HK$129.20.

Hang Lung Properties

(HLPPY)

dipped 2.8%, to HK$30.10.

Most telcos were heavily sold, as these momentum favorites were some of the biggest gainers previously.

China Mobile

(CHL) - Get China Mobile Ltd. Report

and

China Unicom

(CHU) - Get China Unicom (Hong Kong) Ltd. Report

both shed 5%, to HK$118.50, and HK$16.60, respectively.

China Netcom

(CN) - Get Xtrackers MSCI All China Equity ETF Report

lost 3.3%, to HK$23.65, but

China Telecom

(CHA) - Get China Telecom Corp. Ltd. Report

held up, losing just 1%, to HK$6.11, as investors were reluctant to bet against what they think may be the new winner in the industry's mainland restructuring process.

Despite the heavy selling, which followed a dip of 4% on Tuesday, many expect a sharp rebound in the Hang Seng soon, and say that in particular Hong Kong Exchanges may rise as much as 10%, to HK$190, as funds are forced to cover deep short positions.

Rumors were also circling that

China Development Bank

may have rejected a $2 billion investment offer in

Citigroup

(C) - Get Citigroup Inc. Report

because the bank is waiting for a further discounted price. Turnover on the exchange was at a two month high of HK$145.1 billion, or $18.6 billion.

"The focus will now be on U.S. interest rate cuts, and

if they are deep that will be the buying excuse," says Conita Hung, head of equities at Delta Asia Financial in Hong Kong.

Hung also added that if Citigroup can successfully complete a quick share sale stateside that would also be a key driver for a rebound in the Hang Seng.

In China, Shanghai's index was dragged down by PetroChina and

China Shenhua Energy

(CUAEF)

which combined, comprise 24% of the weighting in the market. PetroChina "A" shares fell 2%, to 29.66 yuan, while China Shenhua Energy tumbled 5%, to 63.92 yuan.

In Japan, the yen rallied to 106.22 vs. the dollar, from 107.63 in Tuesday's trading. The hardest hit stocks in Japan were the star performers of 2007, including

Nintendo

(NTDOY)

, which plunged 8.5% to 54,000 yen,

Sony

(SNE) - Get Sony Corp. Report

, which dived 6.8% to 5510 yen and

Kobe Steel

(KBSTY)

lost 6.3%, to 326 yen.

Megabanks were also hammered, after Citigroup announced its massive writedown.

Mitsubishi UFJ

(MTU)

slid 4.7%, to 952 yen, and

Sumitomo Mitsui Financial

( SMFJY) shed 2.4%, to 574 yen.

In India, the Bombay sensitive Index tracked Chinese declines, falling 382 points, or 1.9%, to 19,868, but held up the most in the region.

Daniel M. Harrison is a business journalist specialising in European and emerging markets, in particular Asia. He has an MBA from BI, Norway and a blog at

www.theglobalperspective.biz

. He lives in New York.