The simmering trade tensions between the United States and China have threatened to spark a full-blown currency war after Beijing allowed the yuan to drop below a level it had previously defended with sustained vigour.

China’s central bank allowed the yuan to sink below the sensitive seven-to-one dollar level for the first time since 2008 in what one expert called a “weaponisation” of the currency. In the wake of Monday’s news, Asian shares slumped to a six-month low.

Beijing has consistently advocated the need for a higher yuan despite accusations from Donald Trump that it was deliberately keeping its currency low in order to flood America with cheap products.

But Monday’s move suggests that Beijing does not see any prospect of reaching an agreement in its trade dispute with Washington in the light of the US president’s threat last week to impose more tariffs on Chinese goods.

The currency weakened to 7.0240 by late Monday morning local time with the People’s Bank of China (PBOC) blaming the decline on “unilateralism and trade protectionism measures” in a clear reference to Trump’s tariff hikes.

Although it tried to play down the significance of “breaking seven”, the move was seen as highly significant by analysts after years of the PBOC trying to build up the currency so it can take what Beijing sees as its rightful place among the world’s leading currencies.

“The fact that they have now stopped defending 7.00 against the dollar suggests that they have all but abandoned hopes for a trade deal with the US,” said Julian Evans Pritchard of Capital Economics.

He added that by linking the devaluation with Trump’s renewed tariff threat, “the PBOC has effectively weaponised the exchange rate”.

El Kaku, a currency strategist at Nomura in Tokyo, said: “It is not surprising if Beijing thinks they should weaken the yuan to negotiate with Trump when the US side is maxing out on tariffs. We expect the yuan to weaken to 7.2 this quarter.”

However, not all observers agreed China had deliberately started to devalue the yuan in order to hit back at Trump, with some arguing that it was market pressure on many Asian currencies that had proved hard to resist.

“They don’t want to infuriate Trump any further,” said Cliff Tan of MUFG in Hong Kong. “We are seeing strong sell-off pressures in the Korean won which is quite sensitive to the Sino-US trade war. The Taiwanese dollar is falling sharply, too.”

Uncertainty in the region also increased thanks to protests in Hong Kong that appeared to be building into more widespread civil disobedience and disruption of the financial hubs economy.

Asian share markets were a sea of red with Japan’s Nikkei shedding 2.3% to the lowest since early June. It was the sharpest daily drop since March and led Japanese officials to call a special meeting to discuss market turmoil.

Australian shares slipped about 1.5% to spend their fourth straight session in the red, and South Korea’s Kospi tumbled 2.1% to hit its lowest since December 2016.

But the biggest losses were seen in Hong Kong where the Hang Seng index was off 3% at 4.30am GMT after the city’s chief executive warned that it was heading towards a “very dangerous situation”.

The rush to sell shares meant that bond yields rose as investors opted to place money in government treasuries. Gold also rose while oil extended losses with Brent down 35c at $61.54.

