-- Standard Chartered's Hong Kong-listed shares slump on U.S. allegations of illegal transactions with Iran and broker downgrades

-- The U.K. lender rejects accusations made by the New York regulator that it didn't comply with U.S. regulations

-- Analysts say it's too soon to comment on the outcome of the matter

(Recasts 1st paragraph, adds share price in 2nd paragraph, bank's statement in the 4th-6th paragraphs and analysts comment's in the 8th-10th paragraphs.)

 
   By Fiona Law and Yvonne Lee

HONG KONG--Standard Chartered PLC's (STAN.LN) shares in Hong Kong tumbled to their lowest level in more than two and a half years on Tuesday, hit by broker downgrades following allegations by New York's financial regulator that the bank's U.S. unit ran a "rogue institution" that "schemed" with Iran's government to hide illegal transactions.

At 0600 GMT, Standard Chartered plunged 7% to HK$174.9, its lowest level since Nov. 27, 2009, after its London-listed shares dropped 6% late Monday.

The New York State Department of Financial Services on Monday threatened to revoke the license of Standard Chartered Bank, a U.S. unit of the U.K. bank located in midtown Manhattan, as it accused the bank of hiding more than $250 billion in illegal transactions for nearly a decade.

Standard Chartered on Tuesday rejected the accusations by the U.S. regulator, saying that the amount in question has been over-stated.

"The group does not believe the order issued by the DFS [New York State Department of Financial Services] presents a full and accurate picture of the facts," it said in a statement. The banking group said it has conducted a review over the past few years and has always complied with U.S. regulations on transactions.

The total value of transactions which didn't follow U.S. regulations was under $14 million, the lender said.

The U.S. claims against Standard Chartered are the latest to hit the beleaguered banking industry already reeling from scandals including Barclay's libor-rigging case and J.P. Morgan's recent $2 billion trading loss, with banks facing increasing scrutiny on their corporate governance and practices.

Still analysts said it's too early to speculate on the outcome of the U.S. investigation on Standard Chartered.

Although Standard Chartered can easily absorb any potential penalty on this issue, J.P.Morgan said the focus will be on the bank's New York license and its U.S. dollar-clearing operations, which is the seventh largest in the world and a key driver of robust first-half earnings in the wholesale banking business.

Nomura, meanwhile, downgraded the bank's rating to Neutral from Buy, citing "serious" allegations that are likely to lead to "material headline risk."

But what's more damaging in the long-term is the negative impact on Standard Chartered's reputation, said Citic Securities analyst Steven Chan. "U.S. business only accounts for a small proportion of Standard Chartered's balance sheet. What's more important is whether the Hong Kong regulator questions its role as a fit and proper institution," he said, adding the bank generates huge revenue and profits from Hong Kong.

The Hong Kong Monetary Authority wasn't immediately available for comment.

On Monday, Benjamin M. Lawsky, superintendent of the New York State Department of Financial Services made the allegations in a 27-page order, saying the agency's ongoing investigation of the U.K. bank "has uncovered evidence" of "schemes" by a Standard Chartered subsidiary in New York to conduct business with U.S.-sanctioned countries, such as Libya, Burma and Sudan.

The New York agency ordered officials of Standard Chartered's U.S.-based subsidiary to "explain these apparent violations of law" at a hearing later this month.

Write to Fiona Law at fiona.law@dowjones.com and Yvonne Lee at yvonne.lee@dowjones.com