Chinese stocks plunged to their lowest level in 13 months on Tuesday.

The Shanghai Composite Index fell by 6.42 percent, its biggest loss since the first week of January, to close at 2,749.79 points. The ChiNext startup index in Shenzhen tumbled by 7.63 percent.

The sell-off triggered a market stampede as more than 1,000 stocks fell by the 10 percent daily trading limit.

Li Xunlei, chief economist at Haitong Securities, said, "It was panic selling amid a reduced risk preference from investors." But Li said the sell-off did not necessarily suggest any further deterioration of the economy.

The sell-off intensified during the afternoon despite the People's Bank of China pumping 440 billion yuan ($66.9 billion) into the market to ease liquidity pressure ahead of Spring Festival. It was the most in market funding for a single day in nearly three years.

Investors' shrinking appetite for the volatile market was highlighted by the continued reduction of shareholdings by margin traders who borrowed money to buy stocks.

Hong Hao, chief strategist at investment bank BOCOM International in Hong Kong, said the bearish trend is not over despite the monetary authority's intervention to calm fluctuations in the renminbi exchange rate.

The Shanghai index has slumped by 22 percent this year.

Analysts have attributed the decline to various factors, including concerns about a slower economy, slumping oil prices as well as unsettled global markets.

The market volatility has also triggered investors' concerns over the health of the Chinese banking sector.

Global rating agency Moody's Investors Service said in a report, "Chinese commercial banks show little direct holdings of listed stocks, except for associated companies, so their direct exposure to recent stock price volatility is low."

But it warned that some banks that are more involved in extending stock loans, distributing stock-related wealth management products and providing custody services to stock funds could see pressure on their asset quality and profitability if market weakness persists.