Experts expected the long-expected concrete support measure to give a strong boost to weak investor sentiment, following heavy sell-offs this year.

The benchmark Shanghai Composite Index closed 4.15 percent higher at 3,278.33 yesterday, before the tax cut announcement. Despite the rise, it has dropped 37.7 percent this year after almost doubling last year.

After approval from the State Council, or Cabinet, the Ministry of Finance (MOF) and State Administration of Taxation (SAT) decided to cut the transaction tax, said a government statement.

The tax would be levied on both sides of the transaction, said the statement.

The government raised the stamp tax to 0.3 percent from 0.1 percent on May 30 last year, in a bid to cool the stock market.

Qiu Yanying, an analyst at TX Investment Consulting Co., said the move showed the government's desire to see a stable market and would help to restore investor confidence.

"Confidence in recovery is more important than fund injections," said Qiu. "After earlier panic and irrational selling amid a breakdown in confidence, it is hard for the market to return to normal."

"It was no longer a question of investment, but confidence," said Li Feng, an analyst at Galaxy Securities.

Qiu said the move was timely, an if it had been delayed, it could have triggered heavy losses and become less effective.

"Three thousand points is an important threshold for both regulator and investors and a sustained decline below the mark could be disastrous to investor confidence and trigger further selling."

The key Shanghai index dropped below 3,000 points only briefly on Tuesday, before bargain hunting pushed it to close 0.99 percent higher at 3,147.79.

"Further market declines can also have a huge negative impact on the economy," said Cao Fengqi, head of Peking University's finance and securities research center.

Analysts said a prolonged fall would hurt consumer spending, an increasingly important driver behind the country's economy with exports growth slowing on signs of a US recession.

First-quarter losses by 346 mutual funds in China reached 647.5billion yuan (US$93 billion), eight times the amount of the previous quarter, according to TX Investment Consulting.

The latest move followed a couple of recent support measures. The China Securities Regulatory Commission (CSRC) on Sunday ordered block trading for bulk sale of shares freed from the lock-up period and said Monday it had punished two fund managers for insider trading.

When more than 1 percent of a listed firm's total shares are sold within a month, the trade should be conducted through a separate block trading system operated by the Shanghai and Shenzhen exchanges, the CSRC said.

Li added the market was expected to see a sustained rebound in the second quarter on low valuations, an ease in liquidity pressure, and no lower than 30 percent growth for first-quarter corporate profits.