China plans to target material on websites, including pornographic and violent videos, according to media reports.

Youku's shares were down 6 percent at $17.86 in early afternoon trading on the New York Stock Exchange, while Tudou was down 9 percent at $26.67 on the Nasdaq.

Youku does not have much exposure to user-generated content, the main target of the government campaign, but Tudou, which Youku bought in March, gets a large percentage of its revenue from such content, ThinkEquity analyst Henry Guo told Reuters.

Founded in 2005, Tudou — which means potato in Mandarin and alludes to the image of an Internet couch potato — focuses on user-generated content and makes its own drama serials. It went public on the Nasdaq in August last year.

Oppenheimer analyst Andy Yeung said the new regulation would require website operators to hire and train more staff to self-censor content uploaded by users.

Youku.com agreed to buy Tudou in an all-stock deal worth more than $1 billion in March, creating an industry leader with more than a third of China's online video market.

Youku currently leads the fragmented Chinese online video market with a 21.8 percent share, ahead of Tudou's 13.7 percent, according to internet researcher Analysys International.

China heavily filters the Internet, and blocks popular foreign sites such as Facebook, YouTube and Twitter and in 2011, it shut 50 microblogs for distributing pornography and carrying "vulgar content.

In March, Chinese regulators made it mandatory for Beijing-based microbloggers to register on the Weibo platform using their real identities or face unspecified legal consequences, in a bid to curb what Communist officials call rumors, vulgarities and pornography.

(Reporting by Sruthi Ramakrishnan in Bangalore; Editing by Anil D'Silva, Saumyadeb Chakrabarty)

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