HONG KONG (Reuters) - Hong Kong's main share index .HSI surged more than 4% on Wednesday, ahead of the government's formal withdrawal of the proposed extradition bill that sparked three months of protests in the former British colony.

FILE PHOTO: Hong Kong Chief Executive Carrie Lam speaks to media over an extradition bill in Hong Kong, China July 9, 2019. REUTERS/Tyrone Siu/File Photo

Hong Kong Chief Executive Carrie Lam later announced the formal withdrawal of the bill at a meeting after markets closed, a source at that meeting told Reuters.

The move would meet one of the protesters’ key demands.

The Hang Seng closed at its highest in a month at 26,523.23 points, having rallied over 4% at one point, outpacing the 1.6% gains in MSCI's index of Asia-Pacific shares ex-Japan .MIAPJ0000PUS and 0.9% rise in Shanghai shares .SSEC.

Property stocks .HSNP jumped 7.4% while the financial sector sub-index .HSNF climbed 3.8%.

Flag carrier Cathay Pacific 0293.HK, which has been caught in the crossfire between Chinese authorities and protesters in Hong Kong, rallied more than 7%.

“There are people covering their short positions and bargain hunting on local blue chips,” said Alex Wang, director at Ample Finance Group, as investors hope the formal withdrawal of the bill “will calm down the situation in the society.”

The protests against the bill, that would have allowed extraditions to mainland China, began in March but snowballed in June and have since evolved into a push for greater democracy.

It was not immediately clear if the announcement of the bill’s withdrawal would help end the unrest. The initial reaction appeared sceptical and muted and the real gauge will be how many people take to the streets.

Dogged by escalations in local protests and the U.S.-China trade war, the Hang Seng lost 7.4% in August.

The double whammy has dampened business activity and dragged property prices in Hong Kong, one of the most expensive real estate markets in the world.

Paul Chan, Hong Kong’s financial secretary, said on Wednesday the operation of the stock market “continues to be smooth and orderly.”

“We are monitoring closely trading volume and shorting on a daily basis, and have not seen anything peculiar,” he said at a televised press conference.

The Hong Kong dollar HKD=D3, pegged to the greenback in a tight range of 7.75-7.85 per dollar, rose almost 0.1%.

(Graphic: HK econ as of Sept 4, 2019, )