Speaking to the Australian Chamber of Commerce in Hong Kong, chief executive Tung Chee-Hwa said his territory faces further shrinkage of the economy and growth in unemployment in the near future.

The main Hang Seng stock index plummeted early this month, and the government blamed speculators for betting on a further decline and driving prices still lower.

On Friday, it announced that it bought shares in order to fight the speculators. This week reports said Malaysia followed suit, indicating Hong Kong's approach may spread.

Countering widespread criticism, Tung said the move was purely defensive and did not signal a change in Hong Kong's policy of not interfering in the markets.

``We are not out there to support the stock market at any level,'' he said. However, he added that the government had to act when speculators drove up interest rates. Higher interest rates are a further drag on the economy.

Although the government has not indicated this week that it bought any more shares, traders said it has been in the market. Before last Friday, the Hang Seng had lost 60 per cent of its value since its peak last August.

As of midday on Thursday, however, the Hang Seng index had gained about 16 per cent back because of government purchases and resulting moves by speculators to cover their short positions.

Short covering refers to investors buying shares they borrowed and sold, betting they could buy them back at a lower price and pocket the difference.Analysts put the government's investment in the market since Friday at around 5 billion Hong Kong dollars ($ 640 million) to as high as 7.7 billion Hong Kong dollars ($ 1 billion).

Several bankers supported the intervention, but other bankers, investors, and politicians have accused the government of contradicting its non-intervention policy and damaging the market's credibility and public confidence.

In a commentary in the Asian Wall Street Journal on Thursday, Hong Kong monetary authority chief executive Joseph Yam defended the move, saying speculative activity threatened to undermine Hong Kong's economy.

``Governments have a role in protecting the level of income and employment of their people,'' he said.

Tung and Yam said intervention was necessary to prevent the Asian crisis from spreading to other emerging markets and ultimately to group of seven economies.