China's reserves, the world's largest, fell by $93.9 billion last month to $3.557 trillion, central bank data showed on Monday.

The drop left market watchers questioning how sustainable China's efforts to support the yuan are, as capital flows out of the country due to fears of an economic slowdown and prospects of rising U.S. interest rates.

"Frequent intervention will burn foreign reserves rapidly and tighten the onshore market liquidity," said Zhou Hao, senior economist at Commerzbank in Singapore.

The offshore yuan weakened following the data release to trade at a record discount to the onshore rate, suggesting investors believe the official rate is being kept too high.

There was relief, though, that the dip in reserves had not been larger, with some commentators predicting in the run-up to the announcement that the drop could be as much as $200 billion.

Still, economists estimated that the fall was probably slightly above the $94 billion figure, given the positive impact of valuation changes as the dollar fell against major currencies. A large portion of China's reserves are held in U.S. Treasuries.

The decline in reserves has quickened following China's near 2 percent devaluation of the yuan on Aug. 11, which stoked fresh concerns about the economy and heavy selling of the currency.

China was so surprised by the reaction to the devaluation that it is likely to keep the yuan on a tight leash in the near-term to head off fears of a global currency war, policy insiders have told Reuters.

MARKETS STILL NERVOUS

Chinese policymakers are now determined to show their financial markets are back to normal, after the devaluation of the yuan, or renminbi, coupled with wild swings in its stock markets caused jitters in markets around the world.

China's Central Bank Governor Zhou Xiaochuan told financial leaders from the world's 20 biggest economies over the weekend that Chinese financial markets had almost completed their correction after a steep run up in stock prices in the first half of the year.

"Currently, the renminbi to dollar exchange rate already tends toward stability, the stock market adjustment is already roughly in place and financial markets can be expected to be more stable," Zhou told G20 finance ministers in Turkey, according to a statement from the central bank.

Zhou's comments, coupled with pledges from regulators to deepen financial market reforms, had limited impact in stabilising China's stock markets on Monday, which closed before the release of the reserves data.

The CSI300 index <.CSI300> of the biggest stocks in Shanghai and Shenzhen closed down 3.4 percent, while the Shanghai Composite Index <.SSEC> was 2.5 percent lower, in the first day of trading following a four-day long weekend.

Chinese equity markets have fallen 40 percent since mid-June, despite the authorities unleashing a volley of policy responses to try and stem the falls.

China's stocks regulator said late on Sunday that it would take more steps to ensure stable markets.

"The government won't normally intervene, but when there are severe, abnormal fluctuations in the markets, the government can't just sit on the sidelines and must take decisive and timely measures," the China Securities Regulatory Commission said.

It added it would consider launching a circuit breaker system for the country's stock indexes, to halt trading if there are particularly wild price moves.

Last week the China-based investment community was put on edge following media reports that the China chairwoman of Man Group Plc, Li Yifei, had been taken into custody to help with a police probe into stock market volatility.

However, Li told Reuters on Monday that the reports were incorrect, saying she spent last week in industry meetings and then took a 5-6 day trip to meditate.

ECONOMIC WORRIES

China's government is also pushing on with attempts to ease concerns about the country's slowing economic growth.

Finance Minister Lou Jiwei was quoted in a central bank statement as saying that central government spending would rise by 10 percent this year, up from the 7 percent growth budgeted at the start of 2015.

A string of soft economic data has made it harder for Chinese regulators to bring stability back to their markets, as fears grow of a hard landing for the world's second-biggest economy.

Earlier on Monday, China revised down its reading for growth in 2014, saying the economy expanded by 7.3 percent, a notch below the previous estimate of 7.4 percent.

This year the economy is headed for its slowest expansion in 25 years, and concerns have been building that it may miss the official growth forecast of around 7 percent.

However, analysts say increased government spending, combined with five interest rate cuts since last November, mean that risk has diminished.

"We remain of the view that the considerable monetary, fiscal and macro prudential policy stimulus already in place and expected will put full-year growth in the 'about 7 percent' range," said Tim Condon, head of research for Asia at ING Bank in Singapore.

China's top economic planning agency tried to back up that view, saying on Monday that the country's power usage, rail freight and property market have all shown improvements since August, indicating the economy is stabilising.

"The economy is expected to maintain steady growth and we are able to achieve annual economic growth target," the NDRC said.

(Additional reporting by Pete Sweeney, Samuel Shen, and Lu Jianxin in Shanghai; Writing by Rachel Armstrong; Editing by Neil Fullick and Mike Collett-White)

By Nathaniel Taplin and Kevin Yao