All 50 blue chips on the Hang Seng Index ended in the red on Tuesday in a broad sell-off that started with the tourism-linked stocks that later spread to all sectors.
The bourse ended the day down 801 points or 2.8 percent to finish at 27,985, in the biggest one-day point-drop since last May.
Market turnover was a massive HK$132.8 billion.
Investors were spooked by confirmation that a deadly virus in China can be transmitted between humans, while confidence was also hit by Moody's decision to downgrade the city's credit rating.
The Hang Seng Index has enjoyed a healthy run-up over the past six weeks, thanks to the China-US trade pact, signs of an improving global outlook and looser central bank monetary policies.
But the optimism has given way to fears about an outbreak of a virus that resembles Sars, a disease that killed hundreds in China and Hong Kong and hammered the local equities market.
The new coronavirus strain, which has spread from the mainland city of Wuhan, has infected more than 200 people.
A top scientist at China's National Health Commission said the strain has now been found to pass between humans, a major worry days before the Lunar New Year holiday, which sees hundreds of millions of people travel across the country.
"The timing is unfortunate as the great migration that is Chinese New Year starts in mainland China," said OANDA's Jeffrey Halley. "The accompanying possibility is that infectious cases could rise. Asia will remember back to the origins of Sars outbreak and its adverse effects on economic activity in the region."
Stephen Innes, an analyst at AxiCorp, warned that "the cost to the global economy can be quite staggering in negative GDP terms if this outbreak reaches epidemic proportions, as until this week the market was underestimating the potential of the flu spreading".
Airlines were among the worst hit stocks. Cathay plunged more than four percent and Air China tumbled nearly six percent.
Casino operators, who rely on tourism, were also sharply lower. Wynn Macau shed 4.8 percent and Galaxy Entertainment was off 3.6 percent.
Among other firms to have been beaten down, market heavyweight Tencent sank 2.7 percent, while property developers were well off with Henderson Land diving three percent and Swire properties 3.3 percent off. (AFP)