The Shanghai Composite fell below the 2,000 mark on Monday to close at a fresh 2013 low with losses accelerating after comments from the central bank exacerbated fears that Beijing will not give into easing pressure.
In an effort to soothe fears of a credit crunch in China's banking system, the central bank stated on Monday that bank liquidity remains reasonable and that it has asked commercial lenders to strengthen cash management.
(Read More: China's Credit Squeeze Deals Fresh Blow to Stocks)
The People's Bank of China (PBOC) has restrained from injecting funds into money markets in an attempt to rein in excessive credit growth, which has seen interbank rates surge over the past two weeks, although they eased somewhat on Monday.
Shanghai Composite Today
The rest of Asian stocks also traded lower on worries over an end to the Federal Reserve's easy money policy. Japan's Nikkei index surrendered early gains to close down 1.3 percent, Australia's S&P ASX 200 fell to an eight-day low and South Korean equities hit a new 11-month low.
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As it is the last week of the second quarter, investors may be closing out of loss-making positions and that could spell further downside for regional indices, said market watchers.
Investors are gradually adapting to the prospect of toned-down stimulus from the Federal Reserve after Chairman Ben Bernanke suggested that an improving U.S economy could signal an end to the central bank's bond-buying program.
(Read More: Why Fed Won't Trigger Messy Rerun of 1994 in Asia)
The Bank for International Settlements (BIS) waved a red flag for global central banks over the weekend, saying that it's time to rein in bond buying and focus on inflation.
Shanghai Below 2,000
The PBOC's comments did not stem the steep sell-off in banking stocks, which took the index to its lowest levels since December. Industrial Bank and Minsheng Bank lost 10 percent each while Pudong Development Bank fell 9 percent.
"Some are suggesting that the current state of affairs in China is very similar to that seen in the U.S. pre-global financial crisis. Leverage was cheap and easy, investors and business leaders alike snapped up credit with glee and high leverage levels were king – then it collapsed. Is China in a similar state of affairs?" said Evan Lucas, market strategist at IG in a morning note.
The sell-off spilled over into Hong Kong, where the Hang Seng Index fell below 20,000 points to hit its lowest level in over nine months.
Australia Down 1.5%
Sydney's benchmark index extended its fall after posting a weekly loss of 1.1 percent on Friday. Gold miners led the losses after prices of the yellow metal edged lower on Monday after ending last week at a near two-year low.
Medusa Mining and Perseus Mining slumped 15 percent each.
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Insurance and wealth management firm AMP tanked 13 percent after warning of a 13 percent drop in its first-half underlying profit.
The Australian dollar moved closer to revisiting last week's 33-month low of $0.9163 against the greenback as it fell below the $0.92 handle in the afternoon session.
Nikkei Down 1.3%
Japan's benchmark index pared gains following a 1 percent spike at the open as global market volatility continued to unnerve investors. The index has traded in a range between 13,431 and 12,549 in the past week.
Support from a weak yen helped cap losses; the currency hit a two-week low against the U.S dollar at 98.7. Still, major exporters like air-conditioner makerDaikin Industries fell 6.5 percent, while construction equipment makers Komatsu and Kubota Coporation fell 6 and 4.5 percent, respectively..
(Read More: Is the Rebound in the Nikkei for Real?)
Prime Minister Shinzo Abe received a vote of confidence for his radical economic policies, dubbed "Abenomics," on Sunday after the ruling Liberal Democratic Party (LDP) won a landslide victory in local elections. Experts called the vote a prelude to crucial upper house elections next month.
Kospi at Year-Low
A weaker yen led South Korea's benchmark Kospi index to fall below the 1,800 mark to its lowest levels since July 2012, extending losses from Friday's 11-month trough.
Telecommunication stocks led the declines as continued foreign selling weighed on the index. SK Telecom lost 5 percent while LG U crashed by 12 percent. Retailers were also lower with both Lotte Shopping and department store Shinsegae down over 3 percent each.
— By CNBC.com's Nyshka Chandran. Follow her on Twitter @NyshkaCNBC