* China stocks hit 1-yr closing low; biggest fall in 8 mths
* Govt moves vs property prices spur 20 pct drop in 1 mth
* Volume 3rd-lowest in 2 mths as retail investors shun market
* China economy, earnings outlook still seen strong (Updates to close)
By Lu Jianxin and Edmund Klamann
SHANGHAI, May 17 (Reuters) - China’s key stock index tumbled more than 5 percent on Monday to its lowest close in a year, led by property stocks, as retail investors fled the market after a month-long rout sparked by the government’s severe clampdown on surging property prices.
The Shanghai Composite Index .SSEC closed at 2,559.9 points, its lowest close since May 4, 2009, and posted its biggest one-day percentage drop in more than eight months as panic selling emerged in the afternoon.
The index has dropped nearly 20 percent in about a month.
“If you look at the thin volume of the market, you know that much of the fall in the index is not based on reality,” said Wu Xiong, senior trader at Rosefinch Investment, a private equity fund.
“It’s a psychological problem that has long plagued China’s stock market: Retail investors stay in the market only for quick profits.”
While the day’s volume of 88 billion yuan ($12.89 billion) was up from Friday’s 82 billion yuan, it was the third-lowest turnover figure in two months, suggesting an exodus by retail investors, who traditionally account for more than two-thirds of market turnover.
Losing Shanghai A shares overwhelmed gainers by 887 to 18.
Wu and several other traders said the index should have the potential to rebound at any time as market fundamentals, including China’s economy and corporate earnings, had not changed much over the past several weeks despite the market slump.
Shanghai has been one of the world's worst-performing major stock markets this year, with a 22 percent slide in the same league as the nearly 25 percent loss in the key Athens index .ATG and Madrid's .IBEX 22 percent decline.
Analysts were unwilling to predict where the index may find support, however, given the panic that had set in among investors and a lack of positive news for the market.
Property stocks bore the brunt of the market's downtrend again on Monday, with Gemdale Corp 600383.SS, one of the day's top-10 shares by traded volume, falling 8.4 percent while sector heavyweight China Vanke 000002.SZ dropped 5.3 percent.
Chinese Premier Wen Jiabao said recently that China should keep housing prices from rising excessively, the Xinhua news agency reported over the weekend, signalling that Beijing’s campaign against property speculation is not over.
Haitong Securities analyst Zhang Qi said the market had become starved of funds in recent weeks as retail investors saw poor prospects for making quick profits from stock trading.
Zheng Weigang, head of investment at Shanghai Securities, added: “There was panic selling from retail investors, whose confidence has been battered by the recent market slump.” ($1 = 6.83 yuan) (Additional reporting by Chen Yixin; Editing by Jason Subler)