Another after-hours profit warning, this time by US Photocopier maker Xerox Corp., set the stage for the weaker tone, but investors were also offloading Internet companies with links to China and, in early trade, Taiwanese tech stocks.

Internet content-related firms with designs on China slid after new regulations from Beijing added to growing investor apathy towards these stocks.

Web portal Tom.com Ltd fell 1.95 per cent to HK$3.80, while Hong Kong.com Ltd, a unit of Nasdaq-listed China Dotcom Corp. ended 3.45 per cent lower at HK$0.56.

On Monday Beijing published sweeping new regulations on Internet companies that limit foreign investment, require strict surveillance against "subversive" content and threaten to close down any unlicenced firms.

Analysts said the rules would provide some welcome clarity over who regulates the sector, but also put added burdens on Internet content companies by requiring them to obtain licences and block some content deemed illegal from their websites.

"There was a lack of clarity as to who essentially regulated the Internet, now you no longer have that," said Matei Mihalca, Internet strategist at Merrill Lynch in Hong Kong. "It's not a big deal but it's a positive step forward and we welcome it," he said.

Mihalca said he thought content providers would have little difficulty in getting licensed, and the new rules could slow the process of consolidation among Internet portals.

The Taiwan government was forced to activate its $ 16 billion National Stabilisation Fund to buy shares in the face of heavy selling, mainly by foreign investors, early in the session.

The government buying helped the key share index, the Taiex recover to post a firmer closing level but did nothing to tackle the underlying reasons for the selling.

Analysts said investors are suffering from a confidence crisis in the wake of some recent government vacillation over two key policy issues.The most significant has been an on-again-off-again decision to build a new $ 5.5 billion dollar nuclear plant.

The anti-nuclear DPP had promised to reevaluate the project during the election campaign but has faced resistance, particularly from the business sector which fears power shortages.

Standard & Poor's Corp. cited that the problems if the nuclear plant is scrapped as one reason behind its decision last month to put Taiwan's credit ratings under review.

Another problem for the government has been its attitude to welfare spending, which the DPP originally wanted to expand but had to backtrack due to the heavy costs involved.

"The backtracking on welfare and the nuclear plant means investors have lost a sense of where things are going," said Chi Lo, regional economist at Standard Chartered Bank.

Indonesian sovereign bond issues were stable despite Monday's news that Standard & Poor's had raised the country's long-term foreign currency issuer credit rating to B-minus from selective default (SD), and its short-term foreign currency rating to C from SD.

Indonesia's benchmark 7.75 per cent bonds due in 2006 were quoted unchanged at 665 basis points over Treasuries, but analysts expected an improvement in Indonesian corporate credits such as Astra, APP and Freeport.

"S&P expects that the government's domestic and external debt should peak this year and sustained primary surpluses should help the government's de-leveraging process going forward," analysts at UBS Warburg said in a note to clients.

Indonesia has also agreed to restructure debts worth 16.97 trillion rupiah ($1.94 billion) owed by the Texmaco Group, the country's biggest corporate debtor.

Under the deal, the Indonesian Bank Restructuring Agency(IBRA) will take 70 percent of a holding company that will be created to oversee Texmaco's textile and engineering units.