By Claire Milhench
LONDON, Jan 4 (Reuters) - Emerging markets suffered their biggest fall in four months on Monday as Chinese stocks slumped by 7 percent and deteriorating relations between Saudi Arabia and Iran drove Saudi foreign exchange forwards close to a 16-year high.
The fall in mainland Chinese stocks meant a bumpy start to 2016 for global markets. The decline was big enough to trigger a new "circuit breaker" in Beijing on the first day that it came into effect.
The sell-off followed weak manufacturing surveys which soured hopes China's economy would start showing signs of improvement after a rough past six months.
Analysts also cited the imminent end of a ban on major shareholders selling stocks and changes to IPO regulations which could make it easier for companies to list, increasing supply.
Other Asian stocks followed Chinese shares lower. Indian stocks fell almost 2 percent to their lowest in nearly two weeks after manufacturing activity there contracted for the first time in more than two years.
Hong Kong shares were also down 2.7 percent, Korean stocks slipped 2.2 percent and the falls extended into Eastern Europe.
Polish stocks led the way, losing 2.3 percent as mixed factory activity data added to nerves about some of the changes its new government is making.
The general weakness pushed the benchmark emerging equity index down 2.7 percent to its lowest since Dec. 15, putting it on track for its biggest one-day fall since August.
"The pressure on emerging markets is still pretty strong," said Guillaume Tresca, senior emerging markets strategist at Credit Agricole. He pointed to low oil prices, struggling economies in South Africa and Brazil and rising tensions in the Middle East between Saudi Arabia and Iran.
Saudi Arabia severed diplomatic ties with Iran after the storming of its embassy in Tehran on Sunday. The attack was triggered by the Saudi execution of prominent Shi'ite cleric on Saturday.
The Saudi riyal is pegged, but it weakened against the U.S. dollar in the forward foreign exchange market. One-year dollar/Saudi riyal forwards jumped to 680 points, not far off a 16-year high hit at the end of December.
"There is a strong fear of a depegging of the riyal, and these fears have increased with the decline of oil prices," Tresca said. "The market is pricing in a depreciation of about 3 to 4 percent."
Oil prices remained under pressure on Monday, with Brent crude futures languishing at around $37 a barrel. The Russian rouble slipped about 0.8 percent against the dollar as stocks in Moscow also sagged.