China's main stock index fell 2.6 percent on Friday, led by index heavyweights such as PetroChina, ending November with a loss of 18 percent -- its biggest monthly drop since July 1994.

The Shanghai Composite Index closed at 4,871.778 points, after jumping 4.2 percent on Thursday in a technical rebound that it failed to sustain.

Market sentiment has been severely undermined by a fall of more than 21 percent in the past six weeks.

PetroChina, the market's largest capitalized stock, was one of the most actively traded shares by volume, dropping 4.6 percent to 31.52 yuan after hitting an intraday low of 31.50 yuan, its lowest since its A shares were listed in Shanghai on November 5. The Shanghai index has sagged 19 percent since PetroChina's debut.

A reasonable price for PetroChina would be around 27 to 32 yuan, said Qin Qimin, senior stock analyst at Shenyin and Wanguo Securities. More time is needed for PetroChina to find a stable floor.

Analysts said any future rebound may invite more profit-taking, given the market's weak sentiment.

Investors have been discouraged by tightening monetary policy, authorities' curbs on fund flows into stocks, a heavy supply of new shares, high valuations and sagging foreign stock markets.

Turnover in Shanghai's A-share market fell to 69.1 billion yuan ($9.3 billion) from Thursday's 80.6 billion yuan. Losing Shanghai stocks outnumbered gainers by 646 to 198.

But some analysts doubted there would be further substantial declines.

After such a steep loss, I really see limited potential for it to fall sharply again, said Zheng Weigang, senior analyst at Shanghai Securities, adding that the index should be able to find support between 4,500 and 4,700 points.

WARY IN NEAR TERM

The index has fallen sharply from a record intraday high of 6,124.044 points in mid-October, but it is still up 82 percent this year.

It was the third time this week for the Shanghai index to close below its 120-day moving average, now at 4,908.333 points. On Tuesday, the index breached the moving average for the first time in nearly two years, sending a strong selling signal to chart-watching investors.

Analysts remained wary about the market's near-term outlook.

The official Securities Times reported on Friday that this week's meeting of the Chinese Communist Party's political bureau stressed the need to prevent a rapid rise in inflation and a potential overheating of the economy.

We are concerned that the government will take tougher monetary tightening steps in 2008, Yang Yun, a fund manager at Industrial Fund, said in a research report on Thursday.

But the official China Securities Journal quoted some experts as saying that the stock market would resume its bull run in 2008, propelled by forecast economic growth of 10.8 percent and a more than 30 percent annual jump in corporate earnings next year.

The recent steep declines in some blue-chip companies such as oil refining giant Sinopec, which has tumbled 35 percent since the listing of PetroChina, may attract some bargain-hunting later this year, analysts said.

But they were skeptical about the prospects for near-term buying. It is too early to buy right now as inflation pressure is still lingering, said Zhang Qi, analyst at Haitong Securities.

Among heavily weighted financials, Bank of China fell 1.98 percent to 6.45 yuan and Ping An Insurance dropped 1.14 percent to 108.73 yuan.

Industrial & Commercial Bank of China, the second largest stock with a weighting of more than 8 percent in the Shanghai Composite Index, edged down 0.37 percent to 7.99 yuan.

Bucking the trend, beer maker Yunnan Honghe Guangming soared 70 percent to 12.40 yuan on Friday after announcing it had completed its state share reform, following a trade suspension in its shares since June 4.

(Editing by Charlie Zhu and Edmund Klamann)

China Investment