China's benchmark stock index edged down on Friday as investors became cautious ahead of the week-long National Day holiday, with many concerned about what would happen in the United States and other markets as the credit crisis unfolds.

Many investors were cautious amid the uncertainties in the U.S. credit crisis and regional markets, said Liu Zhenguo, an analyst at South China Securities.

The Shanghai Composite Index dropped for the first time in three days, closing 3.72 points, or 0.16 percent, lower at 2,293.78. It was down as much as 2.2 percent at one point before it recovered on late-afternoon buying.

The key index gained 21 percent since last Friday, when the government scrapped the tax on stock purchases and encouraged state-owned enterprises to raise stakes in bid to shore up investor confidence.

The Shenzhen Component Index rose 182.43 points, or 2.47 percent, to 7,559.27.

Losses were outnumbered by gains by 427-408 in Shanghai and 392-313 in Shenzhen.

Combined turnover shrank to 93.2 billion yuan (13.6 billion U.S. dollars) from the previous day's 116.1 billion yuan

The Shanghai index's decline on Friday was led by banks and insurers, which fell on profit-taking after recent rallies.

Ping An Insurance plunged 8.25 percent to 33.27 yuan. Bank of China fell 1.08 percent to 3.66 yuan and Hua Xia Bank fell 1.53 percent to 8.36 yuan.

Major securities firms, however, surged on media reports that China's cabinet has agreed to let investors buy shares on margin and conduct short sales.

Bloomberg cited an unidentified official as saying on Friday that the State Council signed off on a China Securities Regulatory Commission plan submitted this month to allow margin lending and short selling.

Citic Securities rose 7.28 percent to 24.76 yuan. Haitong Securities jumped 9.46 percent to 21.52 yuan.

PetroChina, the largest component of the Shanghai Composite Index, shed 1.31 percent to 12.84 yuan. A company official said there was little room to hike fuel prices, and that price cuts were even possible, according to the Beijing News.

The property sector surged 4.5 percent amid speculation that loosening measures would help them get credit. This possibility pushed the Shenzhen Component Index higher.

China Vanke, the nation's largest publicly traded real estate firm, rose by the daily limit of 10 percent to 6.53 yuan.