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Traders grew concerned that any easing in the world's second biggest economy could hurt the
exports of other countries looking to China's growth as the key to recovery from the global downturn.
Tokyo tumbled 1.65 percent, or 157.85 points, to 9,381.60 and Hong Kong had slipped 0.65 percent by the break.
Sydney was 0.66 per cent, or 30.8 points, lower at 4,624.9, with resources firms hit as they rely heavily on Chinese demand.
But regional markets were off their early lows and some moved into positive territory as the negative impact of the hike faded, with some analysts saying traders may not see too much of an overall impact.
Shanghai was 1.16 per cent up in the afternoon and Seoul rose 0.71 per cent, adding 13.12 points to end at 1,870.44.
The People's Bank of China announced late Tuesday it would raise the benchmark one-year lending and deposit rates by 25 basis points each, as Beijing tries to contain inflation and soaring property prices. It was the first rate rise since December 2007.
"We expect negative sentiment to remain in the short run, weighing on risk assets globally, as global markets are very sensitive to slowdown risk in the country that led the world out of recession," Credit Agricole Corporate and Investment Bank said in a note to clients, according to Dow Jones Newswires.
The move was the latest by the government aimed at winding down huge stimulus measures introduced last year as Beijing tried to guide the country through the downturn.
It has been trying to rein in its red-hot real estate sector, which leaders fear could overheat and derail economic growth, but with little success.
Beijing had held off raising rates partly due to concerns that such a move could attract speculative money chasing a higher yield and so complicate efforts to keep the Chinese yuan stable.
Inflation has been on the rise in recent months, growing at its fastest in nearly two years in August, as food prices climbed due to severe floods and unusually hot weather that destroyed crops.
Authorities have also been keen to cap bank loans -- which hit a record last year during the drive to boost the economy -- amid concerns too much bad debt for lenders could lead to defaults.
The dollar was holding on to its gains made in New York on Tuesday after the rate news. Traders bought the greenback due to its status as a safe haven in a time of uncertainty.
The euro bought $1.3774 in Tokyo morning trade, hardly changed from New York late Tuesday, where it had fallen from 1.3906.
The dollar edged down to 81.38 yen from 81.54 yen earlier in New York. It had sat at 81.21 before the rate rise.
"The rate hike triggered dollar buybacks as it reversed the recent market movements" that were focused on growing expectations of US monetary easing, said Mizuho Corporate Bank markets economist Daisuke Karakama.
The hike comes as data to be released Thursday is likely to show the Chinese economy slowed to high single-digit growth in the third quarter, after expanding 10.3 per cent in the second quarter and 11.9 per cent in the first three months of the year.
On oil markets New York's main contract, light sweet crude for November delivery, rose 41 cents to $79.90 a barrel after dropping 3.49 dollars late Tuesday in its biggest one-day fall since early February.
Brent North Sea crude for December was up 20 cents at 81.30 dollars after closing $3.27 lower the day before.
Gold opened at $1,337.00-$1,338.00 an ounce in Hong Kong, sharply down from Tuesday's close of $1,368.00-$1,369.00 .
In other markets:
-- Taipei rose 0.97 per cent, or 78.39 points, to 8,124.62.
MediaTek, the island's leading IC design house, closed 3.15 percent higher at 392.5 Taiwan dollars while Taiwan Semiconductor Manufacturing Co edged up 0.49 percent at 61.0.
-- Manila closed flat, edging up 0.71 points to 4,191.96.
Metropolitan Bank rose 1.4 per cent to 71.00 pesos, Banco De Oro was unchanged at 59.95 and Aboitiz Power added 1.6 per cent to 26.00.
-- Wellington slipped 0.46 percent, or 14.93 points, to 3,243.01.
Telecom ended down 1.5 per cent at 2.03 New Zealand dollars and Fletcher Building shed 0.9 percent to 8.13. Air New Zealand slipped 3.0 percent to 1.31.