China's benchmark index reversed course for a second time on Friday to close down 0.6 percent following an earlier spike of 5.6 percent that propelled the index to two-and-a-half-month highs.
The rest of Asia was broadly lower in response to Shanghai's volatile trade and Wall Street's overnight fall. Australia's S&P ASX 200 and Japan's Nikkei lost 0.8 percent each while South Korea's Kospi eased 0.2 percent.
Shanghai down 0.6%
China's benchmark index witnessed a sudden surge of buying in late morning trade, which saw the index rally to its highest levels since June 16, before reversing those big gains to close in negative territory.
Traders attributed the wild swings to a variety of factors, including a possible erroneous trading order from brokerage Everbright Securities, whose shares have since been suspended. Other rumors included a possible cash reserve ratio cut for banks and futures-related trades ahead of the settlement of August contracts.
"Talk of a fat finger [trade] surfaced, while there was also talk of some very bullish news due to be released on the banks, which in theory would make sense why the volume in some of the mainland banks was extreme. There was also talk of a near-term RRR (reserve ratio requirement) wrongly placed ETF order, however one thing is for sure; it caught a lot of traders by surprise and whatever the outcome, these sorts of moves do not help confidence," wrote Chris Weston, market strategist at IG in a note.
Financials pared gains with China Minsheng Banking and Shanghai Pudong Development Bank up over 1 percent each following an earlier 8 percent surge.
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Gold miners also rallied with Lingbao Gold adding over 3 percent and Zhongjin Gold higher by 1.3 percent after prices of the yellow metal hit a two-month high.
Fed fears in the spotlight
A tumble on Wall Street overnight hurt sentiment in the rest of Asia. U.S. major averages posted their biggest two-day losses since June with the Dow dropping over 200 points as the market continued to gauge when the Federal Reserve might start to reduce its asset purchases.
Strong economic data highlighted the case for a reduction in the Fed's stimulus. Consumer prices edged up 0.2 percent in July, in line with expectations; while weekly jobless claims hit their lowest level in nearly six years. Traders said the data sent 10-year Treasury yields spiking to 2.82 percent, its highest level in two years, before pulling back to 2.75 percent.
Nikkei loses 0.8%
Japan's share market pared earlier losses as the yen weakened 0.2 percent against the greenback. Still, the index was down for a second straight session after the previous day's 2 percent losses.
The slightly weaker yen pushed some industrial stocks into positive territory with semiconductor maker Dainippon Screen up 2 percent and real estate developer Tokyo Tatemono higher by 3 percent.
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But weakness in key exporters capped gains on the index. Construction equipment makers Kubota and Komatsu lost 3 and 2.4 percent, respectively.
Sydney slips 0.8%
A rally in Australian gold miners helped the benchmark index cap heavier losses following extended gains in gold prices. Newcrest Mining rose over 4 percent and Kingsgate Consolidated surged 8 percent.
Australia New Zealand Banking tumbled over 3 percent despite posting an 11 percent rise in cash profit for the nine months through June, which it said is in line with internal forecasts. Other banks fell on ANZ's sudden decline with Westpac lower by 1 percent.
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Energy producer Santos rallied 3.8 percent after reporting a 3 percent rise in first-half net profit.
Kospi down 0.2%
South Korea's benchmark index played catch up with the region after being shut on Thursday for a public holiday.
Auto giant Hyundai Motor rallied 1.5 percent after President Yoon Gap-han vowed to resume negotiations with labor unions to resolve a wage dispute.
Shippers rallied on optimism of an improvement in inter-Korean relations after Pyongyang Seoul agreed to re-open the Kaesong industrial factory. Hyundai Merchant Marine climbed 7 percent and Hanjin Shipping added 5 percent.
— By CNBC.com's Nyshka Chandran. Follow her on Twitter @NyshkaCNBC