Local government intervention failed to arrest a diving Taiwanese stock market yesterday as investors reacted in near panic to the victory of Democratic Propressive Party candidate Chen Shui-bian in the election on Saturday.

The market at one stage nudged its fall safety net of 3.5 per cent before closing 2.6 per cent down on the day as the local government pumped in billions of dollars. The Taiwan Stock Exchange weighted price index dropped 227.22 points overall to 8,536.05.

The Taiwan dollar fell only slightly as the "central bank" intervention shored up the currency against selling pressure.

Minutes before the stock market opened, the local government announced it would reintroduce its stabilization fund, which was to have closed last Friday, to prevent a market free fall.

The government said in the next two weeks, the stabilization fund will intervene depending on the market's condition.

Yu Yin-kai, analyst at Grand Cathay Securities, estimated the government spent up to 15 billion Taiwan dollars (US$487.55 million) drawing on both the stabilization fund and four other government-linked funds.

"The Taiwan authorities are not very active in supporting the market because its intervention at this point would do little to halt panic selling," he said.

However, the fact that the stabilization fund would be in effect for two weeks suggested the local government anticipated a bearish market for the rest of the month, an expectation which Yu feared would spark more sell-offs.

"Investors are likely to speed up selling given that the local government anticipated more losses in the next two weeks," he added.

Yu feared further market volatility if violent protests outside the Kuomintang (KMT) party headquarters worsened.

Riot police have several times charged the thousands of people protesting outside the building since the KMT was swept out of power in the election. The demonstrators blame KMT chairman and outgoing "president" Lee Teng-hui for the defeat and are demanding his resignation. (China Daily)