SHANGHAI (Reuters) — China's main stock index fell 5.25 percent to its lowest close in 10 weeks yesterday, as new listings add to share supplies and a special bond issue threatens to pull liquidity from the market.The market has fallen more than 15 percent in a little over two weeks and analysts said it faced a medium-term correction, after an overheated rally that had quadrupled the value of the index since the start of last year.

"With huge stock and bond supplies pouring into the market, the liquidity-driven bull run seen last year and earlier this year is over," said analyst Cao Xuefeng at West China Securities.

The Shanghai Composite Index finished at 3,615.872 points, its lowest close since April 20. It has steadily pulled back from a recent high of 4,311.997 points on June 20.

Large-cap blue chips such as Bank of Communications (BoCom) (601328.SS) led the fall after outperforming the market and lending support to the index during recent pullbacks, indicating investor sentiment was worsening.

BoCom was yesterday's biggest index mover, closing down 5.69 percent at 10.45 yuan. Top insurer China Life, the second-biggest index mover, slid 3.77 percent to 39.28 yuan.

Their losses helped to make financials the worst-performing sector, accounting for nearly half of the index's decline.

Losing Shanghai stocks overwhelmed gainers by 826 to 48. Turnover in Shanghai A shares was light at 73 billion yuan ($9.6 billion), little changed from Wednesday and less than one-third the daily record on May 30, suggesting many investors were shunning the market.

Until an abrupt pause in late May, orchestrated by official cooling steps including a hike in the stock trading duty, millions of Chinese had poured into stocks, helping to push market turnover five times its early 2006 levels.

Analysts said the market's pull-back, however, did not point to a weakening economy.

"It's a classic market meltdown after too big a gain," said Ren Chengde, senior analyst at Galaxy Securities. "But the bursting of the stock bubble doesn't reflect any serious problems with China's strong economy."

While the index repeatedly hit record highs in May, the average price-earnings ratio of companies listed on the Shanghai and Shenzhen bourses at one point exceeded 50 times their historical earnings, triple the figure for Hong Kong.

The government, while saying it has no intention of pushing the market lower, is accelerating its approval of initial public equity offers, which has dampened sentiment due to the prospects of an increased supply of shares in the market.

Several large companies listed in Hong Kong, including PetroChina, China Construction Bank and Shenhua Energy, have announced plans for large stock offers on the mainland's market, expected to raise between 200 billion and 300 billion yuan in the next two or three months.

State media said yesterday the Ministry of Finance would soon begin the sale of 500 billion yuan in special bonds, the first batch of a planned 1.55 trillion yuan special bond issuance for the launch of a state investment firm.

Fund managers said they expected the index to continue to fall in the short term but believed it would find support at its recent low of 3,404 points hit on June 5.

"The recent fall indicates the market has established a medium-term corrective trend which may last for a couple of months," said Yan Zhenghua, chief strategist at China Asset Management Co.

"But the market shouldn't see a very deep correction due to China's robust economy and rising corporate earnings," he said.

Dozens of Chinese listed companies have forecast their interim earnings would jump at least 50 percent, supported by an economy that has grown at least 10 percent a year since 2003.