HONG KONG (AFP) - Hong Kong equities dived 4.26 percent by mid-morning Wednesday, as contagion from China's stock rout spread into regional markets and on fears about Greece's future in the eurozone.

The Hang Seng Index had plunged as low as 4.97 per cent in morning trade, and was at its lowest point since mid-March.

Hong Kong investors have been buffeted by two crises, with the sell-off in mainland markets coming as Greece edges closer to a eurozone exit after a Sunday referendum rejected creditors' plans to reform its bailout.

The Shanghai Composite Index slumped 6.97 per cent, or 259.72 points, to 3,467.40. The Shenzhen Composite Index, which tracks stocks on China's second exchange, dropped 4.07 per cent, or 78.61 points, to 1,854.22.

"China's stock market rout is now spreading to other financial markets, creating a sweeping sense of panic and liquidity crunch," Zheng Ge, an analyst at Wanda Futures Co., said by phone in Beijing.

Mainland markets have plunged around a third in just over three weeks and investors are now worried about the spill-over effect on the already struggling Chinese economy. Bloomberg News reported that trading has been suspended on more than 1,200 shares in China.

Mainland investors have lost confidence in the Chinese stock market which is spurring them to sell off in Hong Kong, said financial analyst Castor Pang.

"The main reason the Hong Kong market is going down is because these two markets (Shanghai and Hong Kong) have high correlation, with many mainland companies listed in both," said Pang.

A stock link-up between the Hong Kong and Shanghai exchanges saw investors flood in to the Hong Kong market from April, boosted by a long-running rally in Shanghai.

The stock connect programme was initially met with little interest when it began in November, but mainland authorities' decision in March to expand the number of fund-management firms allowed to buy in Hong Kong saw activity surge.

"A lot of Chinese investors who are trading through the stock connect are trying to withdraw money from the Hong Kong," said Pang, adding that share value in many smaller firms was dropping more than 20 perc ent a day.

"Those who are investing in both the Hong Kong and China stock markets have no choice but to sell their shares in Hong Kong," Pang said, with some unable to trade on the Shanghai market after Wednesday's share suspensions, he said.

If the sell-off continued, it would become a "chaotic situation" said Pang, head of research at Core Pacific-Yamaichi.