Traders and analysts cited a confluence of reasons for the slide in addition to profit-taking. These include fears of tighter liquidity in the financial system, worries about the cooling economy and anxiety over looming liberalization of initial public offerings (IPOs), which some investors fear could result in a cash crunch.

The benchmark Shanghai Composite Index dropped 6.4 percent to 2,741.25, its biggest one-day loss since Jan 26. The blue-chip CSI300 index slumped 6.1 percent to 2,918.75 points.

The bearish sentiment spilt over into Hong Kong, where the benchmark Hang Seng index dropped 1.6 percent and the Hong Kong China Enterprises Index was off 2.4 percent.

China's stock markets have lost nearly half of their value since early June last year and have struggled to recover despite a massive and unprecedented rescue effort by the government and regulators. The plunge, along with China's surprise devaluation of the yuan currency in August, roiled global financial markets and added to fears of a hard landing for the world's second-largest economy.

But more recently, mainland stocks have rebounded roughly 10 percent from 14-month lows hit in late January, fueled by a global market recovery, central bank efforts to stabilize the yuan and hopes that Beijing will unveil more stimulus.

The rebound follows a typically bullish pattern ahead of an annual meeting of China's top legislature, which starts on March 5, but traders say the thematic rebound could come to an end.

"Market confidence is still fragile and economic prospects remain gloomy, so investors could be taking profit earlier than in previous years," said Wu Kan, head of equities trading at Shanghai-based investment firm Shanshan Finance.

Gu Yongtao, strategist at Cinda Securities, pointed also to worries about tighter liquidity - evidenced by a spike in the rate of China's one-day interbank bond repurchase agreement (repo) on Thursday, as the central bank gradually withdraws liquidity that was pumped into the banking system before and during the Chinese New Year holiday.

"Many instruments used to pump money into the system mature, and there's no sign the central bank will cut banks' reserve ratios any time soon. So there is concern that liquidity will become tight," Gu said.

Further damping sentiment is the looming IPO reform, which could start as soon as next month. The reform will see China move toward a U.S.-style registration-based IPO system, while reducing the involvement of regulators in company listings.

"The upcoming registration system would increase stock supply and hit valuation of listed companies," said David Dai, Shanghai-based investor director at Nanhai Fund Management Co.

Small-caps were among the biggest casualties in China on Thursday, with Shenzhen's start-up board ChiNext slumping 7.8 percent.

The market tumble comes as G-20 finance chiefs and central bankers meet on Friday and Saturday, where the current market turmoil and a global economic slowdown are expected to be key topics of discussion.