The sharp drop in afternoon trade highlights the volatility of China's markets ahead of an expected decision by the International Monetary Fund (IMF) on Monday on whether to include the yuan currency in its global reserve basket.

China Haitong Securities (>> HAITONG Securities Company Limited)<6837.HK> is under investigation by the China Securities Regulatory Commission (CSRC), two people with direct knowledge of the matter told Reuters, following similar probes into two other domestic brokers.

Little has emerged as to the specific reasons for the probes, but Gu Yongtao, an analyst at Cinda Securities, said the regulator could be trying to get a better grip on leveraged trading after a near full-blown market crash a few months ago.

"We think the purpose of the probes is to bring all businesses related to stock financing to the table so that regulators can have a clear picture of the leverage situation," he said, adding it is likely an extension of an ongoing clean-up in illegal margin trading.

Markets had already been jittery after sources said on Thursday the regulator is urging brokerages to cease financing clients' stocks purchases through swaps and other over-the-counter contracts, a move aimed a curbing leveraged trading.

“The move towards deleveraging is certainly having a negative impact on investor sentiment," said Shen Weizheng, fund manage at Shanghai-based Ivy Capital.

Haitong is being investigated for alleged violations of securities regulations. Both of the sources declined to be identified because they were not authorised to speak to the media on the matter.

The CSRC probes come on the heels of investigations into CITIC Securities (>> CITIC Securities Company Limited)<6030.HK> and Guosen Securities (>> Guosen Securities Co Ltd), two of Haitong's bigger rivals.

Haitong declined immediate comment on the issue, saying only that there would be a statement after the stock market close on Friday. Trading in Haitong's shares was halted this morning.

The CSRC did not immediately respond to Reuters requests for comment.

SLIDING MARKET

Earlier selling pressure intensified late in the stock trading session, pushing the blue-chip CSI300 index <.CSI300> down 5.4 percent and the Shanghai Composite Index <.SSEC> 5.5 percent lower in their biggest one-day percentage loss since late August, the depth of the summer rout.

The flagship indexes also posted their worst weekly performance since August, losing over 5 percent.

Market sentiment had already been fragile as investors braced for a fresh batch of initial public offerings that will kick off next week, and are cautious ahead of a possible U.S. rate increases next month.

After the stock market slump began in mid-June, Beijing launched a massive and unprecedented rescue effort and began cracking down on insider trading and short-selling, which it said were partly to blame for volatility.

Haitong, along with Guotai Junan Securities (>> Guotai Junan Securities Co Ltd), is also being probed by anti-corruption investigators, the official Xinhua news agency reported on Tuesday.

In September, Haitong was fined 86 million yuan (9 million pounds) by the regulator for breaching securities rules.

In August, state media reported that a CSRC official and four senior executives from CITIC Securities had confessed to insider dealing.

The yuan softened to a three-month low against the dollar on Friday and was set for its longest weekly losing streak in five months ahead of the IMF's decision next week.

Some traders expect Beijing may allow the currency to depreciate after it is included in the IMF's Special Drawing Rights basket, partly to reflect China's slowing economic growth. [CNY/]

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(Additional reporting by Samuel Shen and Engen Tham; Writing by Kazunori Takada; Editing by Kim Coghill)

By David Lin and Kazunori Takada