Markets were tipped into freefall on Thursday with both Australian shares and the Australian dollar crunched in the wake of a deepening round of declines on China's markets amid fears that the Chinese government may not be able to stem investor selling.

For the second time this week, China was forced to suspend sharemarket trading following declines of more than 7 per cent in the Shanghai market as investors dumped shares ahead of the planned removal of a six month ban on share sales by large companies.

The downturn has wiped an estimated $78 billion off the value of Australian shares this week alone with the market falling more than 5 per cent as the key ASX 200 index has slid towards the 5000 point level and the Australian dollar has fallen to two month lows at around US70¢.

After trading in its sharemarket was suspended on Thursday, China issued new rules to restrict share sales, which prompted fears it may provoke further selling. Last year, to stabilise its market, the Chinese government banned share sales by large companies for six months with that ban due to expire at the end of this week.