HONG KONG - ASIA stock markets retreated for a third straight day on Tuesday as more investors locked in profits on the year-end rally and prepared to close their books on one of the worst years in decades.

The South Korean won and other regional currencies slipped, surrendering some of their gains posted this month as foreign investors have gradually warmed up to investing in riskier assets as market volatility has subsided.

Trading was limited, with Japanese financial markets closed for a national holiday and many market players away from their desks before Christmas and other year-end holidays.

The Shanghai Composite fell 2.2 per cent after China's central bank trimmed interest rates by 27 basis points, disappointing some investors in a move that was smaller than expected given the aggressive actions by other central banks.

Last week Federal Reserve and Bank of Japan slashed rates to virtually zero in the world's two largest economies and launched more asset-buying plans to ward off a deeper recession.

The array of measures by major central banks have helped calm investors, revive some bank-to-bank lending in strained credit markets and sparked a minor stock rally into year-end.

Governments have also rolled out big spending packages.

But economists at Goldman Sachs warned that the United States would need ongoing fiscal support because the usual economic recovery drivers since World War Two - such as strong homebuilding, consumer spending on durable goods and corporate inventory restocking - will be missing in action.

'The US economy needs not only a large package of fiscal stimulus in 2009, but one that provides substantial support beyond next year,' they said in a note to clients.

The MSCI index of Asia-Pacific stocks outside Japan dropped 2 per cent and is down 54 per cent for the year, what would be by far the worst yearly slide in its 20-year history.

But since hitting a five-year low in November, the MSCI index has recovered about 25 per cent.

Evidence of the damage inflicted on the global economy continues to pile up.

New Zealand's economy contracted by the biggest amount in eight years in the third quarter, reinforcing the case for more central bank rate cuts.

On Monday, figures showed Japanese exports plunging at the fastest annual pace on record in November, while Toyota Motor Corp said it would post its first-ever annual operating loss.

The Toyota news cast a shadow over other automakers, with shares of South Korea's Kia Motors tumbling more than 8 per cent.

Data later in the day is expected to show Taiwan's export orders fell 10 per cent in November from a year earlier, what would be the largest since 2001.

A slew of US economic indicators will also be released before the holidays, including The mild risk reduction before year-end, along with worries about the global recession hurting demand next year, also hit commodity prices. US crude oil shed 45 cents to US$39.46, while metal futures also fell.

The dollar was down slightly against the euro and other major currencies, with this year's rebound petering out after being fuelled by US investor repatriations, the widespread asset deleveraging and rush to secure short-term dollar funding.

The euro edged up 0.4 per cent from late US trade to US$1.3995, off a three-month high hit last week.

But against the won, the dollar climbed 2 per cent to near 1,335.

The dollar index, a gauge of its performance against six major currencies, is still up nearly 6 per cent this year for what would be its biggest gain since 2005.

US Treasuries were little changed in Asia trade due to the holiday in Japan, where many bond dealers base their regional operations.

The benchmark 10-year note was flat in price to yield 2.174 per cent, holding near a five-decade low of 2.040 per cent touched last week after the Fed reiterated that it was considering buying longer-term Treasuries.

SHANGHAI
China shares fell on Tuesday as investors disappointed by a meager interest rate cut and worried about its potential impact on banks' balance sheets dumped financial shares and other heavyweights.

The benchmark Shanghai Composite Index tumbled 4.55 per cent, or 90.53 points, to 1,897.22 in an afternoon rout that saw heavy losses in banks, insurers, airlines, resource and property shares.

PetroChina, the market's heaviest weighted share, fell 4.6 per cent to 10.43 yuan.

China cut interest rates late on Monday for the fifth time in four months in a new effort to revive economic growth amid mounting anxiety about spreading job losses and worker protests. But the 0.27 percentage point cut in the benchmark one-year lending rate failed to impress investors, analysts said.

'Most bank shares fell on concerns over the impact of lower interest rates on their profits,' said Peng Yunliang, an analyst at Shanghai Securities, in Shanghai.

'Rationality was discarded in panic selling,' Mr Peng said.

'Investors' confidence is on the edge of collapse.'

Though a rate cut might be expected to boost property shares, major real estate developers also were hit as investors cashed in on recent gains.

Poly Real Estate dropped 6.4 per cent to 16.03 yuan and China Vanke Ltd, the country's biggest developer, lost 4.9 per cent to 6.98 yuan.

KUALA LUMPUR
Malaysian shares closed 0.3 per cent lower on Tuesday amid lacklustre trade, dealers said.

The Kuala Lumpur Composite Index lost 2.27 points to close at 871.16 with a volume of volume of 309.8 million shares worth RM327.22 million (S$135 million).

Decliners outpaced gainers 308 to 172 with 187 unchanged.

'Liquidity is becoming an issue as volume continues to shrink ahead of the year-end holidays,' a dealer told Dow Jones Newswires.

'Selling pressure from retail players and foreign funds is likely to cap gains in the near term,' he added.

Among decliners, KL Kepong fell 2.2 per cent to RM8.75 ringgit while plantation giant IOI Corp dropped 2.8 per cent to RM3.54.

On the upside, national power company Tenaga rose 1.7 per cent to RM6.0 as Petronas Gas inched up 0.5 per cent to RM9.80 and Berjaya Sports Toto increased 3.1 per cent to RM4.70.

HONG KONG
Hong Kong share prices closed 2.8 per cent lower on Tuesday, as China stocks suffered from a smaller-than-expected interest rate cut by Beijing, dealers said.

The benchmark Hang Seng Index closed down 401.60 points at 14,220.79.

Turnover was light at HK$31.95 billion (S$5.9 billion).

Dealers said investors also took profits ahead of the Christmas break after a stronger performance by the bourse over the past two weeks.

TOKYO
Japanese financial markets were closed on Tuesday due to a public holiday. The markets will reopen on Wednesday. -- AP, REUTERS, AFP, BERNAMA