BOSTON -- Millions of American mutual fund investors are bracing for losses in the wake of Tuesday's sharp market drop, which is likely to have hit Asian funds and small cap funds the hardest, portfolio managers, analysts, and advisers said.

"Whatever momentum we had for February has probably been erased. Many people will see the year's returns hit hard, if not erased completely," said Jeff Tjornehoj, an analyst at fund research firm Lipper Inc, a unit of Reuters . Through last Thursday, the average U.S. stock fund returned 4.54 percent, Lipper data show.

But on Tuesday investors were unnerved by a large decline in China's market and disappointing U.S. durable goods numbers. They pushed both the Dow Jones industrial average and Standard & Poor's 500 Index down more than than 3 percent, the largest one-day percentage drops in almost four years.

As portfolio managers and analysts tried to pinpoint the reason that markets dropped so sharply, they also speculated on the types of stock funds that would suffer the most after managers collate their data following the market close.

"Our fund probably experienced a decline of roughly 2 percent today," said Jim Oberweis, who manages the red-hot $590 million Oberweis China Opportunities fund, which was up 12.75 percent through Monday after surging 81 percent in 2006.

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Analysts and other managers agreed with Oberweis that the the 9 percent decline in China's market, where many companies had been trading at 40 times expected earnings or about double the valuations in Hong Kong, was long overdue.

FURTHER TO FALL?

But they are not yet sure how much further prices will fall and how vulnerable the roughly 52 China funds, which returned 6.23 percent on average this year, will be.

"There is the possibility that when things get going they get out of control, and the reaction in the U.S. market was some indication of that," Oberweis said, adding, "that is the one concern I have."

Even conservative investors who avoided China are likely to suffer the fallout from Tuesday's rout, because by the end of the day the trouble had spread to include U.S. household names, which are likely to affect more offerings in the $10 trillion mutual fund industry.

"Something happened between noon, when the China matter seemed to have been fully digested, and 3 pm," said Thomas Metzold, a vice president and portfolio manager at Eaton Vance, explaining that investors who gravely underestimated risk got a "wake-up call."

Metzold and others said fears about U.S. companies that make loans to riskier borrowers fed the decline and that funds holding shares of financial companies such as JPMorgan Chase , which dropped 3.13 percent on Tuesday, or Citigroup , which fell 3.95 percent, will be hurt.

Financial services funds have returned 3.05 percent this year, according to Lipper data, and analysts expected those gains to be wiped out. Also gains among small cap stock funds that specialize in companies that do a lot of business overseas may be erased, they added.

And funds that bet the U.S. dollar would gain against the Japanese yen or euro, like some of the Rydex offerings, are also likely to have taken a hit after the greenback suffered, analysts said.

On the flip side, large cap core funds, which returned a modest 2.95 percent this year, will probably weather the storm well, because they invest in companies such as General Electric , which lost only 1.92 percent.

As investors try to interpret market moves, financial advisers and analysts expect to see money being shifted among asset classes in a hurry, with bonds finding favor.

"I don't think people expected so much bad news in one day, and so you will be seeing a lot of defensive moves among investors," Lipper's Tjornehoj said.

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