(Updates to market close)

SHANGHAI, March 22 (Reuters) - China's yuan declined to

a four-month low against the dollar on Friday, breaching a key

threshold and prompting state-owned banks to step in to defend

the currency.

In the spot market, the onshore yuan fell to the

weak side of the psychologically important 7.2 per dollar level

to hit a low of 7.24, its softest since Nov. 17, 2023.

Market sources told Reuters that state banks stepped in

subsequently to buy the yuan for dollars. The yuan was at 7.2275

at the domestic close (0830 GMT), 281 pips softer than the

previous late session close.

The sources declined to be identified because they are not

authorised to speak publicly about market trades.

The yuan has fallen roughly 2% in three months, and has been

pressured by growing market expectations of further monetary

easing to prop up the world's second-largest economy as well as

a weaker Japanese yen.

Carlos Casanova, senior economist for Asia at UBP, said the

strengthening dollar and sharp depreciation in the yen and some

Asian currencies after the Bank of Japan ended its negative

interest rate policy, have weighed on the yuan.

"The market seems to have interpreted Asian currencies

should depreciate further against the U.S. dollar until the

D-day of interest rate cuts by the Fed," he said.

Prior to the market opening, the People's Bank of China

(PBOC) set the midpoint rate, around which the yuan

is allowed to trade in a 2% band, at 7.1004 per dollar, 62 pips

weaker than the previous fix of 7.0942.

The Chinese central bank has for months been setting the

rate at levels firmer than market projections, traders said.

Friday's midpoint was 1,143 pips firmer than a Reuters

estimate of 7.2147, the biggest discrepancy since November.

The offshore yuan weakened to 7.2712 at one point

in late Asian trade, the weakest since Nov. 14, 2023.

Traders attributed sudden weakness in the yuan to rising

monetary easing expectations after senior PBOC officials hinted

at there being further room to reduce bank reserve requirements.

China has room to further cut banks' reserve requirement

ratio (RRR), among other policy tools at its disposal, a deputy

central bank head said on Thursday, underlining market

expectations for more easing measures to bolster the economy.

Ju Wang, head of Greater China FX and rates strategy at BNP

Paribas, expects the central bank's message on further monetary

easing will cause the yuan to test lows around 7.3 again.

The yuan's sudden weakness weighed on stock markets too,

with the benchmark Shanghai stock index down 1%.

If there are signs China is allowing the yuan to depreciate

from 7.2 to 7.3, "it would definitely make it more difficult for

this equity rally to continue, because a lot of people would try

to diversify into U.S. dollar exposure," Casanova said.