* Traders take profits after Monday's bounce
* Financial and resource stocks down
* Deposit rate liberalization, Ag Bank results weigh China stocks fell on Tuesday on fears that moves to liberalise deposit rates will squeeze banks' margins, and as some investors took profits after a rise in the previous session.
The CSI300 index fell 1.9 percent to 3,522.00 points by the end of the morning session, while the Shanghai Composite Index lost 1.8 percent to 3,367.33.
China CSI300 stock index futures for November fell 1.2 percent, to 3,415.4, nearly 107 points below the current value of the underlying index, pointing to expectations of further losses.
Mainland indexes bounced on 0.5 percent Monday following interest rate and reserve ratios cuts by the central bank late on Friday.
The moves were the latest in a year-long policy campaign to support the cooling economy, but investors on Tuesday were more focused on whether China's accompanying decision to scrap a long-standing ceiling on bank deposit rates would trigger a war among lenders for new funds.
Bankers who spoke to Reuters doubted such a scenario, reckoning lenders will focus on protecting margins instead, but the changing landscape added to worries about pressures facing banks as the economy slows.
Weak results from the Agricultural Bank of China Ltd late on Friday have heightened those concerns.
AgBank was the first major Chinese bank to report third-quarter profit, which was barely positive at 1 percent year-on-year growth, after falling 0.8 percent in the second quarter.
Also weighing on sentiment on Tuesday were energy stocks such as Petrochina, which fell 2 percent on lower oil prices.
"The sell-off is not that severe, but I think traders are a bit cautious after the market failed to hold onto its gains yesterday," said Alex Wong, Director of Asset Management at Ample Finance Group in Hong Kong.
"I also think people didn't like the Agricultural Bank results, and they don't like the the deposit rate liberalization which will compress net interest margins further.
"Agricultural Bank saw its NPL [non-peforming loan] ratio finally cross 2 percent. Finance is leading the way lower and will continue to underperform I think. Some resource sector stocks are also weighing on the market."
Freeing deposit rates, a long expected step in China's ongoing financial sector reform, should push banks to more effectively allocate capital and put more money in consumer pockets, but also threatens banks' profit margins, especially when lending rates are also trending down.
"The securities and insurance companies led the drop this morning," said Zhang Gang, an analyst at Central China Securities in Shanghai.
"The correction was still seen in the market after a bout of profit-taking on the rate cut on Monday, and I think the SSEC will move within 3200 to 3400 points in the near-term. It is a little bit difficult for it to go back above 3500 points."
In Hong Kong, the Hang Seng index dropped 0.8 percent to 22,929.42 points.
The Hong Kong China Enterprises Index lost 1.7 percent to 10,569.49.
The index measuring price differences between dual-listed companies in Shanghai and Hong Kong stood at 128.94.
A value above 100 indicates Shanghai shares are being priced at a premium to shares in the same company trading in Hong Kong, and vice versa.
The northbound quota for the Hong Kong-Shanghai Stock Connect, currently set at 13 billion yuan, saw net inflows of 0.39 billion yuan.
Total volume of A shares traded in Shanghai was 17.73 billion shares, while Shenzhen volume was 20.71 billion shares.
Total trading volume of companies included in the HSI index was 0.6 billion shares.
China stock market graphics suite reut.rs/1NfkoGl
includes timeline of crash, PE ratios, market caps Reporting by the Shanghai Newsroom and Nathaniel Taplin; Editing by Kim Coghill