"We have a currency board, so essentially we are dollarised anyway," said professor and head of the department of finance at Hong Kong's University of Science and Technology KC Chan.

"But the market can still doubt whether the government has the resolve to keep it, so there are speculative attacks on the currency that drive up interest rates, killing the economy."

The Hong Kong dollar is pegged to the US dollar at a rate of HK$7.8 per US$1 and is permitted to float in a narrow band around the level. By law, the issue of local dollars must be fully backed by foreign currency reserves.

Under the currency board system, pressure for a weak Hong Kong dollar automatically causes interest rates to rise and vice versa. Repeated speculative attacks against the currency over the pastyear have kept markets nervous and rates high.

Hong Kong leaders have steadfastly vowed to defend the peg, even though higher interest rates have contributed to a 56-per cent plunge in share prices since the stock market's peak in August 1997 and a painful decline in the real economy.

"There is a thin line that separates a firm currency board from dollarisation," said foreign exchange strategist at Warburg Dillon Read Cliff Tan.

"Speculators are attacking the system and the idea is that if you just removed the fiction of calling certain pieces of paper (Hong Kong dollars) one thing and start calling them something else (US dollars), you remove the logic for the speculation," said Tan.

With currency risk gone, the spread between Hong Kong and US rates would narrow and theoretically, could evaporate.

"While the deflationary trend would intensify as Hong Kong prices fell to US prices, the risk of huge increases in interest rates, followed by political capitulation and mass bankruptcies, would falldramatically," Santandar Investment said in a report issued last week.

Warburg Dillon Read said in a recent report that for full dollarisation, Hong Kong would need to cover with the US dollar reserves every single deposit and loan in the system, in other words, the M3 measure of money supply, according to the report. Now, only 46 per cent of M3 has to be covered, it said.

But chief economist at HSBC Markets Jan Lee said full coverage of M3 would not be necessary because Hong Kong enjoys the implicit backing of China's foreign currency reserves, which stood at US$140.5 billion at the end of June. Chan said full reserve backing was unusual by international standards.

"In any kind of banking system, there is never 100-per cent backing. All the deposits and loans in the system are usually a multiple of the reserves kept by banks," he said.

Dollarisation would have its costs. If Hong Kong were to make such a move, the government would give up its ability to devalue the currency or let it float. Politicsmight make dollarisation difficult, some said. "If Hong Kong were to dollarise, it would raise questions about Beijing's sovereignty and that could undermine financial market confidence," said HSBC's Lee.

Others said China's leaders were pragmatic and would accept dollarisation if they thought it would protect Hong Kong. Critics also have argued that dollarisation would violate Hong Kong's mini-constitution, the Basic Law, which states that the Hong Kong dollar must continue to circulate.

But analysts said the government could get around that by minting a small amount of Hong Kong coins each year. The real question, many said, was whether dollarisation would be a smart move now -- or a last-gasp measure.

Santandar called dollarisation "the only real option." But HSBC's Lee said adopting the system would raise questions about the government's ability to handle the economy and could hurt confidence.

"It would be a last resort to save what was left of Hong Kong's economy," he said.