SHANGHAI (Reuters) - China stocks tumbled 8.3 percent on Monday in their second biggest drop this decade, erasing $340 billion in market value and extending big losses from last week after the government hiked the share trading tax to cool a feverish bull run.

In an apparent attempt by authorities to restore confidence, front-page editorials in official newspapers tried to reassure investors the market's medium- and long-term outlook was still positive, and that the tax hike was merely aimed at speculators.

But that failed to stop selling by many of the anxious and often inexperienced individual investors who had jumped into the market in recent months for what seemed like easy money.

"This is obviously panic selling, and the sentiment is quickly spreading across the market," said Wang Jing, deputy general manager at Everbright Securities.

"But the fall is normal today, given the fact that the market has gone up so much. It won't be surprising if the index falls to about 3,000 points -- which would mean a 30 percent correction from the top."

However, many analysts and fund managers said they did not believe the government, which has made a strong stock market central to its economic reforms, would permit an extended slide which could fuel social unrest or threaten China's rapid economic expansion.

The key index has now lost 15.3 percent from last Tuesday's record intra-day high. A fall of 10 percent is an internationally accepted definition of a bear market in stocks.

Global stock markets, which were roiled by a heavy Chinese market sell-off in late February, appeared to be taking the latest slump in stride, though many Asian markets came off the day's highs as the rout in Shanghai worsened.

"I knew the market would go down, but I did not expect it would be this fast. After a small plunge, it should go up, but it is not going up," said Madame Wang, a pensioner in her 50s, who put some of her savings into stocks during the bull run.

"Next time I will remember -- once the market falls, I will sell all my stocks."

Many fund managers and analysts in Asia said the index, which had risen 62 percent this year to last Tuesday's close after surging 130 percent in 2006, had room to fall much further in coming days as the excesses of the bull run were corrected.

But many also said they did not believe the market as a whole was going into freefall.

Most worrying to analysts were deep falls in some of the blue chips favored by institutional investors, since those stocks had stayed firm last week even as speculative shares tumbled.

Oil refiner Sinopec, which had risen 16 percent over the final three days of the week, sank its 10 percent daily limit to 13.65 yuan.

Industrial & Commercial Bank of China, the country's biggest bank, dropped 8.1 percent to 4.99 yuan.

The Shanghai Composite Index ended the day at 3,670.401 points, its lowest level since April 25. Losing stocks overwhelmed gainers by 846 to 17, with about 466 shares plunging their 10 percent daily limits.

Turnover in Shanghai A shares was active at 143.0 billion yuan ($18.7 billion), but down sharply from Friday's 224.7 billion yuan, suggesting many investors were pulling out of the market.

"Most new retail investors are too speculative to envision the mid- to long-term positive market trend. Their exit will cause a market landing, be it hard or soft," Morgan Stanley said in a report.

Traders see strong technical support for the index around 3,600, where it briefly peaked in mid-April. That level would still leave the market up 35 percent from the start of this year.

"Since the index has even fallen below 3,700 now, I believe the correction is about over," said Zheng Weigang at Shanghai Securities.

Another disillusioned investor at an Everbright Securities branch in Shanghai's financial district, a woman in her 30s surnamed Xu, said:

"I used to have confidence in the stock market. But how can I have confidence now that it has fallen so much. I have no more confidence. Even if the government wants to regulate the stock market, it should not be done like this."
Conflicting views here, but it's the first time I've seen real worry in some of their eyes. Confidence has clearly been shaken. What's next?