Hong Kong shares drift lower after three-day rally

* Bank stocks pull back after recent sharp gains

* PCCW moves higher on hopes buyout nearing completion

* Turnover drops as uncertainty creeps in (Updates to close)

By Parvathy Ullatil

HONG KONG, April 7 (Reuters) - Hong Kong shares closed down 0.5 percent on Tuesday, retreating after piling on nearly 11 percent in a three-day rally, while turnover shrank as investors turned wary after falls in U.S. financial stocks.

But losses were limited by advances in Chinese bank stocks as the Shanghai Composite Index .SSEC rose to a seven-month high and on reports of strong loan growth on the mainland in March.

"China banks are expected to post strong earnings in the first quarter after new lending in just the first three months came in close to the full-year target," said Philip Chan, head of research with CAF Securities.

New lending is expected to have touched 1.3 trillion yuan in March, the Chinese state media reported last week, posting a third consecutive month of strong loan growth. [ID:nSHA21946]

Hong Kong's benchmark Hang Seng Index .HSI ended 69.07 points lower at 14,928.97 after hitting a three-month high the previous session. The index is up 3.8 percent so far this year.

"Its just the kind of pullback that was expected after the index hit 15,000 points on Monday," said CAF's Chan.

Turnover dropped to HK$50.9 billion from Monday's HK$62.2 billion.

Some market watchers are still betting the blue chip index will work its way up to 15,800 points in the near-term with investor sentiment boosted by signs of stabilisation in the U.S. economy and a faster recovery in China.

The China Enterprises Index .HSCE of top mainland firms was 0.4 percent lower at 8,772.65.

PCCW (0008.HK) shares edged higher on market views its long-impending buyout was one step closer to completion, despite the appeal against the court's approval of its privatisation plan. The stock spiked to a high of HK$4.12 after opening at HK$3.95, before settling up 0.5 percent at HK$4.00.

A Hong Kong court on Monday said it would allow a $2.2 billion plan to take tycoon Richard Li's PCCW private to proceed, but the city's securities watchdog quickly appealed in a case over alleged vote buying. [ID:nHKG137050].

Energy stocks dropped as crude oil fell below $51 a barrel on Tuesday as stock markets sputtered and the dollar gained against the euro.