FINANCIAL MARKETS : Tokyo Stock Drop Triggers Asian Selloffs : Markets: U.S. rate hike fears and rumors of Deng Xiaoping’s failing health add to downward pressure.

Tokyo stocks’ 5.6% plunge Monday fueled vicious selloffs in Asia’s smaller markets, worsening the bearish tone that has gripped most of them for the past year.

Following on the heels of the stock meltdown in Latin America since Mexico devalued its peso in December, Asian markets’ renewed slide has left global stock investors with few hiding places.

In Singapore, the Straits Times stock index dove 111.67 points, or 5.5%, to 1,916.94 on Monday, its lowest close in 17 months. After dropping 7.7% last year, the Straits Times index is down 14.4% so far this year in local currency.

Also falling to a 17-month low Monday was Hong Kong’s Hang Seng index, off 4.3% at 6,967.93.

In Bangkok, the SET index fell 60.46 points, or 4.8%, to 1,191.26, and Malaysia’s Kuala Lumpur exchange saw its key index fall 35.03 points, or 4%, to 850.10.

At midday today, markets were mixed, with Singapore and Hong Kong up slightly and most others off modestly.

Global investment fund managers said Monday’s Asian-market losses were triggered by the selloff in Tokyo, where foreign and domestic investors dumped stocks on worries about financial fallout from the devastating Kobe earthquake.

But most smaller Asian markets had been under pressure for weeks, a result of deepening concerns on several fronts, experts say:

* Expectations of another Federal Reserve Board hike in short-term interest rates have undermined markets such as Hong Kong, Thailand and Taiwan, which tie their currencies to the U.S. dollar and thus also tie their interest rates to U.S. rates. Higher rates are expected to slow economic growth.

* Rumors that China’s paramount leader, Deng Xiaoping, is near death have sparked fears of political and civil turmoil in China, arguably Asia’s most important developing economy.

* Mexico’s currency devaluation caused many global investors to wonder which other countries might also devalue because of fiscal troubles. In Asia, Thailand in particular has been singled out as ripe for devaluation.

* Most important, the Mexican debacle and the steep losses suffered by investors in Latin American stocks since late December have raised fears that First World investors--especially Americans--are souring on foreign stocks.

So some global mutual fund managers have been selling out of Asian markets, boosting cash levels in anticipation of more shareholders selling out.

“I think everybody is fearing capital outflows” from Third World stock markets, said Christian Wignall, a principal at GT Global Funds in San Francisco. “Mexico was a wake-up call.”

Yet so far, U.S.-based mutual fund companies say shareholder redemptions from global or foreign funds have been mild. If most investors stay put, analysts say, the growing cash hoards at the funds could fuel a fast rebound in many Third World markets.

The problem is that many fund managers don’t believe Asian stocks as a group are wildly appealing, even after last year’s heavy losses in many of those markets. Those declines followed skyrocketing stock prices in 1993. Today, judging Asian stocks relative to underlying corporate earnings, prices “aren’t particularly attractive,” Wignall argues.

“I see a buying opportunity sometime in the first half of this year” in Asia, said Richard King, manager of the Warburg Pincus International Equity fund. But for now, he said, the bearish sentiment in many Asian markets means it’s too soon to rush in.