Hong Kong shares closed lower on Thursday, dragging the key index to a fresh one-year low, as investors dumped property, financial and exporter stocks after the Chinese government failed to confirm speculation it would implement a new package of measures to support the economy.

Chinese and Hong Kong shares rallied on Wednesday on talk Beijing would spend about 400 billion yuan ($58.4 billion) to bolster the nation's economy and stock markets. On Thursday the benchmark Shanghai Composite Index closed down 3.6 percent, reversing the previous day's 7.6 percent gain.

"Yesterday's rally was based on an unsubstantiated rumour that China will spend 400 billion yuan to support the economy and the markets. The government has not confirmed it. So now, sanity has returned to the market," said Francis Lun, general manager at Fulbright Securities.

"There may be some truth to it. But these are just the options that the government might do. It doesn't mean that they will do it."

The Hang Seng Index fell 539.20 points or 2.6 percent to finish at 20,392.06, erasing Wednesday's 2.2 percent gain. It was the lowest close since August 17, 2007, when it settled at 20,387.13.

Before Wednesday's rally, the stock market had fallen for three consecutive days and closed at one-year lows in two of the sessions.

A total of HK$55.74 billion worth of shares were traded, down from HK$62.33 billion previously.

Tycoon Li Ka-shing's flagship developer Cheung Kong (Holdings) dropped 2.8 percent to HK$101.10. At the midday break, Cheung Kong reported its first-half net profit fell 35 percent from a year ago, though the figure was still higher than the forecasts in a Reuters poll.

Hang Lung Properties dropped 3.2 percent to HK$22.60 and Sino Land slid 4.5 percent to HK$12.32.

Index heavyweight HSBC fell 2.6 percent to HK$117.80 and Bank of East Asia retreated 5.2 percent to HK$29.60..

Foxconn International Holdings, a handset maker for Motorola, tumbled 11.4 percent to HK$5.31 and Li & Fung, a consumer goods supplier to U.S. retailers, skidded 3.7 percent to HK$23.25.

China Citic Bank declined 2.6 percent to HK$4.52 as investors focused on the possibility that earnings growth may slow in the second half of 2008. The bank reported that its first-half net profit more than doubled to 8.43 billion yuan from 3.22 billion yuan a year ago.

"The market is looking beyond the first-half performance," said Yu Kei Lee, an analyst at Core Pacific-Yamaichi. "Earnings may decline in the second half (because) lower loans and interest margins are under pressure due to the higher cost of deposits."

Oil refiners and airlines dropped after oil prices edged higher.

China Petroleum and Chemical Corp fell 3.7 percent to HK$7.59 and PetroChina dropped 2.5 percent to HK$9.64.

Hong Kong's Cathay Pacific Airways extended its losses and fell a further 1.8 percent to HK$14.14. China Eastern Airlines plunged 7.1 percent to HK$1.56.