HK shares at 3-wk low on flu fears; China banks drag

* 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 close)

By Parvathy Ullatil

HONG KONG, April 27 (Reuters) - Hong Kong shares fell 2.7 percent to finish at a near three-week low on Monday on worries a potential swine flu outbreak would deepen the economic recession, and ICBC slid ahead of likely strategic investor exits.

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, but the atmosphere was more that of caution than panic.

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 down 418.43 points at 14,840.42

Turnover rose to HK$53 billion from Friday's HK$51.7 billion.

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

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.

"But until 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."

ICBC (1398.HK) fell 5.9 percent to HK$4.02 on expectations of a sell-down when a portion of shares, 2.2 percent of its total shares outstanding, held by foreign institutions 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 announced 6 percent profit growth for the first quarter to 35.15 billion yuan, after market hours on Monday.

Other mainland banks also dropped, with China Construction Bank (0939.HK) down 3.6 percent at HK$4.26. Bank of America can sell a portion of its shares in China's No.3 lender early in May.