HK shares fall 2.7 pct as flu fears hit airlines

* China banks retreat on possible strategic investor exits

* Airlines dive on fears of potential flu pandemic

* Hutch Telecom plunges ahead of new unit share distribution

(Updates to midday)

By Parvathy Ullatil

HONG KONG, April 27 (Reuters) - Hong Kong shares shed 2.7 percent on Monday with Chinese banks beaten down by worries of strategic investor exits in the near term, while concern over a potential swine flu outbreak sent airline stocks tumbling.

Analysts said investors were mindful of the devastating inpact that a global flu pandemic could have in the midst of a recession in major world economies.

Hong Kong seemed to take the news a little harder than other regional markets on Monday, given its past brush with Severe Acute Respiratory Syndrome (SARS), which sent the stock market down 10 percent between mid-February and late-April 2003.

The benchmark Hang Seng Index .HSI ended the morning session down 416.03 points at 14,842.82.

"The flu news gives investors an excuse to carry forward the correction we began last week," said Linus Yip, strategist with First Shanghai Securities.

"But till we hear reports about it spreading outside the U.S. and Mexico, the impact should be fairly limited except on stocks like airlines, food and hotels which will take a direct hit from a confirmed pandemic."

The blue chip index snapped a six-week rally, its longest since late-2007, last week as doubts emerged about the health of the financial sector and the pace of recovery in China.

ICBC (1398.HK) fell 4 percent to HK$4.10 on expectations of a sell-down when a large portion of shares of a foreign strategic holding emerge from a lock-in period on Tuesday.

Goldman Sachs (GS.N), Allianz (ALVG.DE) and American Express (AXP.N) can trade a part of their stakes in the world's most valuable bank and many investors expect them to cash out, at least in part. The lender is due to announce its first-quarter earnings later on Monday.

Other mainland bank shares also dropped, with China Construction Bank (0939.HK) down 2.3 percent at HK$4.32. Bank of America can sell a portion of its shares in China's No.3 lender early in May.

Li Ka-shing's Hutchison Telecommunications (2332.HK) plunged 42.4 percent to HK$1.40 as shareholders who buy the stock from Monday ownwards will not be eligible for shares in the company's newly spun-off unit, which will hold its Hong Kong and Macau telephone business following a separate listing. [ID:nHKG37583]