The finding by the Shanghai Food and Drug Administration (SFDA) deals a blow to KFC's reputation in China, where it is facing fierce competition from the likes of Taiwanese-owned fried chicken chain Dico and Japanese-style noodle chain Ajisen (China) Holdings Ltd. Yum Brands has forecast a drop in same store China sales in the fourth quarter.

Eight of the 19 batches of chicken samples Yum Brands sent to a testing laboratory in 2010 and 2011 contained overly high levels of antibiotics, the SFDA said in a statement on its Website late on Thursday.

An investigation is underway to determine whether Yum Brands had taken corrective measures at that time, and the Louisville, Kentucky-based company may face harsh penalties if the probe showed laws had been violated, the SFDA said.

Shares in Yum Brands have slumped 4 percent since December 18 when China's state television CCTV reported that some poultry suppliers in eastern Shandong province had fed chickens with anti-viral drugs and hormones to accelerate their growth.

The SFDA is looking into the CCTV report and has not released its findings yet, but authorities in Shandong have already shut two chicken farms in eastern China, including one that supplied KFC and McDonald's Corp, the official Shanghai Daily newspaper reported on Thursday.

Officials at Yum Brands in China could not be immediately reached for comment.

KFC's subsidiary in China has pledged to cooperate with the authorities, while McDonald's wrote on its official microblog that its chicken and raw materials pass through independent, third-party laboratory tests.

Shares in Yum Brands, which also owns Pizza Hut and Taco Bell, closed 1 percent lower at $69.49 in New York on Thursday.

China has been trying to stamp out health violations that have dogged the country's food sector amid reports of fake cooking oil, tainted milk and even exploding watermelons. In 2008, milk laced with the industrial chemical melamine killed at least six children and sickened nearly 300,000.

(Reporting by Samuel Shen and Kazunori Takada; Editing by Ryan Woo)

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