HK stocks drop 0.7 pct; China stocks snap four day rally

* Turnover in HK shares drops to HK$50.7 billion ($6.5 bln)

* Xinjiang stocks mixed for second day amid unrest

* Cathay Pacific bucks trend to soar on broker upgrade (Updates to close)

By Parvathy Ullatil and Claire Zhang

HONG KONG, July 7 (Reuters) - Hong Kong shares dropped 0.7 percent as the lack of conviction in a global economic recovery pushed investors to lock in some of the gains made in a four-month rally and kept turnover thin.

Shanghai stocks succumbed to profit-taking after a four-session rally, posting their the biggest daily percentage drop in more than three weeks.

A dry spell for positive news on the global economy has forced fund managers into wait-and-see mode in following a winning stretch by the market.

"Investors are still hesitant to give up on the market and miss their chance to capture this rebound, but with overseas markets losing momentum there is a total lack of direction," said Ben Kwong, chief operating officer with KGI Asia.

CAUTIOUN SEEN IN JULY, AUGUST

The benchmark Hang Seng Index .HSI fell 0.7 percent or 117.14 points to 17,862.27, shedding early gains as Chinese stocks extended losses.

Turnover languished at HK$50.7 billion compared with Monday's HK$54.2 billion.

The main index has been hovering between 17,800 and 18,200 points since late last week, but investors anticipate a bigger correction in the event of news that challenges the assumption of a gradual recovery in the global economy.

Analysts see the next major support for the index at around 16,000 points, close to its 38.2 percent Fibonacci retracement from the bottom it scraped in March to its June highs and the double peak high it hit in April.

"Investors may stay cautious in July-August as we head into the earnings season and the time to verify if there is a V-shaped recovery in the US. China equities will also correct, but should outperform globally," said analysts with RBS, forecasting a 10 to 15 percent retreat by the China Enterprises Index .HSCE.

China Unicom (0762.HK), the country's second-largest wireless service provider, rose 2.4 percent on speculation it was close to signing a deal to launch Apple's (AAPL.O) popular iPhone handset in China.

The China Enterprises Index .HSCE, which represents top locally listed mainland Chinese stocks, fell 1.4 percent or 152.95 points to 10,674.67.