China's banking regulator has ordered lenders to test the impact of a fall in house prices of up to 50 percent in key cities where prices have risen sharply, banking and regulatory sources said on Thursday.

The China Banking Regulatory Commission (CBRC) has also instructed banks to stop extending mortgages to people buying their third homes in four of the cities -- Beijing, Shanghai, Shenzhen and Hangzhou, the sources said.

The move, which runs counter to speculation in some quarters that China might ease curbs before long to boost the slowing economy, is a fresh demonstration that Beijing is intent on fighting property speculation and deflating record high prices.

The government fears sky-high prices in big cities are feeding on themselves and making it impossible for ordinary people to get a foot on the housing ladder.

David Ng, a property analyst at Royal Bank of Scotland in Hong Kong, said: This is another key signal that the government is trying to give -- that it is quite determined to keep property prices under control, even though it's quite unlikely that there will be any new tightening measures in the short term.

An earlier stress test nationwide showed that Chinese banks could sustain a drop in housing prices of up to 30 percent without a sharp rise in non-performing loan ratios.

This is a new round and will be carried out only in key cities where prices have risen fast, a banking official said on condition of anonymity.

The CBRC was not immediately available for comment.

GETTING TOUGH

Three other banking sources said the CBRC has also instructed banks to tighten mortgage terms for third-home buyers in cities other than Beijing, Shanghai, Shenzhen and Hangzhou.

Banks must now require a down payment of at least 60 percent and charge interest of at least 1.5 times the central bank's benchmark rate, they said.

The new requirements clarify cabinet guidelines issued in April, which instructed banks to substantially increase down payments and mortgage rates for third-home buyers.

Depending on their assessment of risks, banks can also stop lending to such buyers in cities where prices are too high or rising too fast or where homes are in short supply, the State Council said.

A source with Industrial and Commercial Bank of China <1398.HK><601398.SS> in Shanghai said it stopped making loans to third-home purchasers in the city this week.

Almost all banks in Beijing had suspended such lending, the sources said.

DON'T LOOSEN UP

Xia Bin, an academic adviser to the central bank, said the clampdown on the real estate market, fueled by record surge of lending last year, had begun to achieve its desired results but could not be relaxed yet.

Property prices in 70 big Chinese cities fell 0.1 percent in June from May, the first month-on-month drop since February 2009. Sales volumes in big cities have also fallen sharply.

Xia, who also advises the cabinet, told a forum that it would take China two to three years to squeeze bubbles out of the real estate sector and that increasing the capital gains tax might be an effective short-term measure to curb speculation.

Wang Xiaoguang, another senior government economist, told the same forum that social pressure and fears about a boom-bust in the property sector, similar to Japan's in the 1980s, would force Beijing to work to restrain further price rises.

The controls will last a long period until property investors finally lose confidence, Wang, who is based at the National School of Administration, said.

He said that the tightening to date had not achieved its ultimate goal because investors still expected home prices to rise and were still putting money in the real estate market.

Shanghai's property share index <.SSEP> fell by over 2 percent, underperforming the broad market <.SSEC>.

The negative impact on property share prices will be subdued for now. The most important thing to watch out for will be its impact on developers' sales over the next 1-2 months, said Ng at RBS.

If developers are forced to cut prices significantly because of a sharp fall in transactions, that's going to be a major drag on property shares, he said.

(Reporting by Langi Chiang and Alan Wheatley in BEIJING and Lee Chyen Yee in HONG KONG; Editing by Ken Wills & Jan Dahinten)

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