Fears of more Chinese policy tightening spooked global markets on Tuesday after Beijing ordered some banks to comply immediately with a planned increase in reserves and a report suggested earlier attempts at curbing lending had failed.

The developments prompted concern that the central bank would get more aggressive about reining in credit to fend off inflation and asset bubbles, potentially dragging on growth in the world's third-largest economy.

China implemented a planned increase in required reserves for some banks on Tuesday, sources said, sparking heavy selling of Asian stocks that underscored how sensitive global investors are becoming to Beijing's tightening of monetary policy.

Qu Hongbin, chief China economist with HSBC in Hong Kong, said five major banks had suggested they had received instructions from authorities last week to slow new lending, but not stop it.

We continue to expect more quantitative tightening measures to cool new lending in the coming months, Qu wrote in a note to clients, adding that he expects a rate increase as early as the second quarter.

That said, we do not believe that Beijing will slam the brakes on credit growth this year, not least because Beijing also has other more effective policy tools to deal with rising overheating risk -- slowing down the pace of new infrastructure projects, he said.

China has been one of the main drivers of the global economic recovery in the absence of a strong rebound in the West and investors fear a slowdown there would stunt its demand for commodities and other imported goods.

The punitive increase in the amount of reserves some banks have to set aside, which was ordered last week, also came after a newspaper report said China's efforts to curb bank lending were meeting with mixed success, fueling fears that policymakers may take tougher action soon.

Chinese banks extended 1.45 trillion yuan ($212 billion) in new loans during the first 19 days of the year as they scrambled to front-load lending, the 21st Century Business Herald reported, suggesting that Beijing is finding it hard to slow robust credit growth which the government fears could lead to the economy overheating.

The People's Bank of China has been withdrawing funds from money markets over the past several weeks, and earlier this month started pushing short-term bill rates higher.

High-ranking officials have been warning bankers of the dangers of excessive lending for months, amid reports that some of the money from loans was being used to speculate in property and stock markets.

China's tightening moves come as investors around the world are increasingly worrying that the global recovery may lose momentum as authorities unwind emergency stimulus policies put in place to combat the global recession.

South Korea reported on Tuesday that its recovery lost steam by the end of last year due to waning government spending, and analysts say it now faces a more serious threat if demand ebbs in China, its biggest export market.

Other data showed Britain finally crept out of recession in the fourth quarter, but only just and with far weaker growth than expected.

China's central bank surprised markets on Tuesday by leaving yields unchanged in its closely watched one-year bill sale, after increasing them in the two previous auctions. But analysts said it was likely only a pause in tightening aimed at leaving enough cash in the system for the long Lunar New Year holidays which begin in the middle of next month.

The auction result shows the central bank wants to stabilize expectations a bit to avoid large market swings. So it is pausing the uptrend in bill yields, said Liu Jinyui, analyst at China Merchants Bank in Shenzhen.

World stocks as measured by MSCI <.MIWD00000PUS> fell 0.8 percent but losses were deeper in Asia.

Taiwan's benchmark TAIEX <.TWII> index suffered its biggest one-day drop in six months while the Shanghai Composite <.SSEC> and Hong Kong's Hang Seng index <.HSI> both dropped 2.4 percent in a broad Asia equity retreat.

Commodities and higher-yielding currencies also fell while the yen jumped as investors moved into lower-risk assets considered to be safer havens.

Reuters reported last week that CITIC Bank <0998.HK> <601998.SS>, the country's seventh-largest bank, and Industrial and Commercial Bank of China (ICBC) <1398.HK> <601398.SS>, the top lender, had been instructed to raise their reserve ratios after excessive lending.

AIM IS TO SLOW LENDING, NOT STOP IT

Chinese media reported that other big lenders had suspended lending in some areas of the country.

The Guangzhou Daily said the Bank of China <3988.HK> <601988.SS> had suspended lending in the southern city of Guangzhou, and that some branches of China Construction Bank <0939.HK> <601939.SS> and Agricultural Bank of China had also stopped making new loans for now.

The crackdown on banks followed the PBOC's first moves to wind down the ultra-loose monetary conditions that had helped fuel the economy's rapid rebound, which in turn buoyed the economies of many of its Asian neighbors.

It raised overall bank reserve requirements on January 12, a move that went into effect January 18, but some analysts noted those moves may have only prompted some lenders to push out loans even faster ahead of implementation of the measures.

Many analysts expect the central bank to resume gradual tightening following the Lunar New Year holidays in mid-February, eventually leading to increases in benchmark interest rates.

($1 = 6.82 yuan)

(Writing by Jason Subler; Additional reporting by Qu Weizhi in Shanghai and Aileen Wang in Beijing; Editing by Ken Wills & Kim Coghill)

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