Zeng Fanzhi's painting "Mao I: From the Masses, To The Masses" is introduced during a news conference in Hong Kong in this October 20, 2008 file photo.

Down a quiet Hong Kong lane beside the century-old masonry of a colonial-era prison, the 10 Chancery Lane Gallery is abuzz as staff hang bright, bold canvasses and hand-painted photos by three female Indian artists.

The past few years have been golden for hundreds of such modish art galleries and antiques dealers dotted about Hong Kong island's jumbled streets, swept along by the Asian art craze and its hip allure with buyers in the region and beyond.

Glitzy art fairs sprang up across Asia, from Shanghai to Tokyo, while records tumbled for contemporary artists such as India's Subodh Gupta, China's Zeng Fanzhi and Indonesia's I Nyoman Masriadi.

But now with the financial gloom, many galleries are bracing for a painful slump as the disposable income of the city's bankers, businessmen and middle-class professionals shrink.

"We haven't seen any downturn in our business but we are seeing it in the auctions, and we expect it to happen," said Katie de Tilly, the owner of the 10 Chancery Lane gallery which will halve its number of shows this year given the bleak outlook.

"If you are investing in art, have your eyes open, very open right now because I can see things coming down in a big way."

CRACKS

While some galleries with their patient stabling of loyal artists and diversified client base have yet to be badly burned, the high-profile art auction market is showing serious strain for both Western and Asian art.

Sotheby's auction of Impressionist and modern art in New York earlier this week fell far short of the $338 million to $475 million that had been expected, as buyers swooped for rare masterpieces but stayed away from lesser works that were generally seen as unrealistically overpriced.

At Sotheby's autumn Asian sales in Hong Kong, seen as a key biannual barometer of market sentiment, the firm only managed to hammer off around half its expected total, with auction rooms stricken by large numbers of unsold lots.

Sotheby's weak showing seemed to mark a symbolic turning point for the seemingly unstoppable Chinese art market, which has skyrocketed these past four years, particularly the works of star artists such as Zhang Xiaogang, Yue Minjun and Cai Guoqiang.

Some experts say the less established reputations of Asian artists versus timeworn western masters make major record-breaking results unlikely at the current time, but their much cheaper valuations make such artists attractive for buyers seeking long run returns.

Chinese art website Artron.net showed a 14 percent fall in its Chinese contemporary art index this autumn compared with the spring, while its benchmark index of 400 top Chinese artists showed a 28 percent decline for the same period.

Much attention is now focused on the next major auction of Asian art by Christie's in late November, with the auction house moderating its usual bullish optimism with a more prudent line.

"It's a volatile period, pricing is going to fluctuate and we really need to be careful about estimates," said Andy Foster, Christie's Asia President.

"And we need to encourage sellers to agree to reasonable estimates and also to be generous to allow buyers to pay, extra time if possible," he added.

Others however go further.

Mei Jianping, a academic who created the Fine Art index, a widely cited measure of mostly Western art market performance, said the contemporary art market could plunge by 50 percent.

"There was a bubble worldwide, not just in Chinese contemporary art, but western contemporary art as well ... but now, the air has been really sucked out, so you'll see a significant cooling down of the market," Mei told Reuters.

POSITIVE

Yet for some gallery owners, the headwinds in Chinese and Western art are being seen as a blessing in disguise.

"I always try and be positive," said Nicole Schoeni, owner of the pioneering Schoeni gallery, one of the first in Hong Kong to promote contemporary Chinese artists such as Yue Minjun in the 90's.

"People are starting to come back down to earth, whether it's the speculative collectors or the artists themselves, and I think ultimately it needed a correction of some sort," she added.

The Opera Gallery group which runs a global chain of galleries in Europe, Asia and the U.S. isn't deterred by the downturn and will expand to fresh sites in Dubai and Geneva.

"As we specialize in a range of art from old masters like Picasso and Chagall to rising artists from Europe, Asia and America, we are not as susceptible to economic volatility," said Stephane Le Pelletier, its Asia Pacific director in Singapore.

For Bangalore-based video artist Surekha whose works delve into Indian identity and womanhood, the art boom has brought perks including her biggest single pay-check of $27,000 for a work sold at a 2005 Sotheby's auction.

While she says some Indian artists have been pressured by the market spotlight, the downturn for her irrelevant.

"We know the no-money days and the money days," the diminutive and bubbly 42-year-old said with a laugh.

"We can still make work, so it doesn't really matter."