Hong Kong's legislature on Thursday vetoed a China-vetted electoral reform package that had been criticised by opposition pro-democracy lawmakers and activists as undemocratic, potentially easing the prospect of fresh mass protests.

The vote came earlier than expected, with only 37 of the legislature's 70 lawmakers present. Of these, 28 legislators voted against the blueprint and eight voted in favour, while one did not cast their vote.

The rejection had been expected and will probably appease some activists who had demanded a veto of what they call a "fake" democratic model for how the Chinese-controlled Asian financial centre chooses its next leader in 2017.

It will, however, be a blow to Beijing's Communist leaders, who had pressured and cajoled the city's pro-democracy lawmakers to back the blueprint that would have allowed a direct vote for the city's chief executive, but with only pre-screened, pro-Beijing candidates on the ballot.

"This veto has helped Hong Kong people send a clear message to Beijing...that we want a genuine choice, a real election," said pan-democratic lawmaker Alan Leong.

"This is not the end of the democratic movement," he said. "This is a new beginning."

Democratic lawmakers, all 27 of whom voted against the plan, marched to the front of the chamber immediately after the veto and unfurled a sign calling for genuine universal suffrage and for Hong Kongers not to give up.

Some carried the yellow umbrellas that became a symbol of the mass protest movement that brought parts of the former British colony to a standstill last year.

"VICTORY OF DEMOCRACY"

In an unexpected twist, moments before the ballot a large number of pro-establishment and pro-Beijing lawmakers suddenly walked out of the chamber.

Outside the legislature, pro-democracy protesters broke into cheers and clapped wildly after the result.

"It's a victory of democracy and the people," said a 75-year-old pro-democracy protester surnamed Wong, who struggled to hold back his tears.

Meanwhile, around 500 pro-Beijing supporters outside the chamber staged a minute's silence then began chanting: "Vote them down in 2016!" calling for democratic lawmakers to be kicked out of the legislature in a citywide election next year.

There were no immediate clashes between the two groups.

Mainland Chinese media warned that a veto of the proposal could pose a threat to the financial hub.

Weeks of pro-democracy protests in Hong Kong late last year posed one of the biggest challenge in years for China's ruling Communist Party, when more than 100,000 people took to the streets.

Hundreds of police were in and around government headquarters with thousands more on standby.

The reform proposal was laid out by the central government in Beijing last August and supported by Hong Kong's pro-Beijing leadership.

Opponents want a genuinely democratic election in line with Beijing's promise of universal suffrage made when the territory returned to Chinese rule in 1997.

The United States said it was watching developments and that Hong Kong people should be given a "meaningful choice" for their next leader.

"The US has an interest in Hong Kong's continued stability and prosperity based on its high degree of autonomy under 'one country, two systems'," Alistair Baskey, a spokesman for the White House National Security Council, said in Washington.

"As we have said previously, the legitimacy of the chief executive will be greatly enhanced if the chief executive is selected through universal suffrage and if Hong Kong's residents have a meaningful choice of candidates."

"RECKLESS ACTIONS"

Rejection of the proposal now means going back to the old system of selecting Hong Kong's leader by a 1,200-member committee stacked with pro-Beijing loyalists

"The fact is that if the opposition camp vetoes the reform plan, political reform will come to a standstill," the influential tabloid the Global Times, published by the Communist Party's official People's Daily, said in an editorial published before the vote.

"If reckless actions continue, the Asian financial hub will be dragged into real chaos."

Democratic lawmakers, however, called on Beijing after the no vote, to restart the democratic reform process and put forward an improved, truly democratic electoral package.

The benchmark stock market index fell around 0.6 per cent after the vote but quickly rebounded.

Raymond Yeung, a senior economist at ANZ, said in a research note that the Hong Kong government could lose credibility and political infighting could impair the business environment, but he did not see any immediate impact on the financial market.