China's key stock index dropped 1.65 percent on Thursday with PetroChina, the most heavily weighted stock, sliding as the market discounted rumours of a possible fuel price hike while other large caps were sluggish.

The benchmark Shanghai Composite Index ended at 3,485.630, after falling as far as 3,469.792.

Losing stocks in Shanghai outnumbered gainers by 598 to 287 and turnover in Shanghai A shares was active at 93.6 billion yuan ($13.5 billion), although down from Wednesday's 96.2 billion yuan.

The index had risen 2.9 percent on Wednesday, led by a 6.6 percent jump in PetroChina on speculation that Beijing may raise state-set fuel prices or take other steps to aid oil refiners, which have been squeezed by surging crude oil prices.

But the official Shanghai Securities News reported on Thursday that China would not deregulate fuel prices anytime soon because the government's priorities were curbing inflation and carrying out earthquake relief.

Analysts said worries about the economic impact of last week's devastating earthquake in southwest China, which spurred a drop in stocks early this week, appeared to be abating.

"Concerns over economic damage from the quake have eased a little, with the media carrying several reports that the government will invest in reconstruction efforts and make sure they are successful, while investors have now begun to worry about how surging oil prices would affect the Economy and global stock Markets," said Li Shiming, analyst at Xiangcai Securities.

OIL PRICES

PetroChina dropped 2.18 percent to 17.47 yuan, with the further rise in crude oil prices increasing downward pressure on the shares. China's refiners have been unable to pass on higher crude oil costs due to the state controls on fuel prices.

Shares in top Asian oil refiner Sinopec, one of the most actively traded stocks, edged down 0.88 percent to 12.44 yuan after rising their 10 percent daily limit the previous session.

Crude oil prices soared to a fresh record above $135 per barrel on Thursday as a surprise drawdown in US crude oil inventories and a weaker dollar prompted heavy fund inflows into the market.

Higher oil prices also pushed airline shares lower, with China Eastern Airlines falling 4.13 percent to 9.99 yuan. China Southern Airlines fell 4.38 percent to 10.92 yuan.

Li Wenhui, analyst at Huatai Securities, said the drop in refiners' shares may have been cushioned by expectations that the government will be pressured to offer support, perhaps beyond the subsidies which they have received in the past.

"I expect the...