HK shares finish at 7-month high in 5th day of gains

* Stanchart soars on record Q1 results; HSBC gains on upgrade

* China Construction Bank slips on worries of stake selldown

* Turnover scales four-month high at HK$80.4 billion

* Analysts believe rally sustained by "late entrant" funds

(Updates to close)

By Parvathy Ullatil

HONG KONG, May 6 (Reuters) - Hong Kong shares rose 2.5 percent on Wednesday, to close at a seven-month high in a fifth straight winning session, led by financial stocks, on expectations that additional capital needs at U.S. banks will mostly be manageable. [ID:nN05459483]

Turnover swelled after European markets opened in the late afternoon session to scale a four-month high of HK$80.4 billion as foreign funds continued to buy into hopes for a quick economic recovery in the region.

"Its a tussle out there between funds who entered the market early and are now ready to take profit and the late entrants who expect a further upside to the market," said Peter Lai, director with DBS Vickers.

Some market watchers said the stocks were overbought, with the valuations of those on the main index topping 15 times their estimated earnings, and see the gauge meeting tough resistance at around the 17,000-point level.

The benchmark Hang Seng Index .HSI finished 404.49 points higher at 16,834.57, its best closing level since early January.

But China Construction Bank (0939.HK) extended Tuesday's losses on expectations of a selldown in H-shares as the lock-in on 13.5 billion shares owned by Bank of America (BAC.N) expires on May 7. The stock trimmed losses to 0.4 percent at HK$4.74 after dropping more than 4 percent earlier.

Investors largely expect the U.S. lender to sell the shares, which represent about a third of its 16.7 percent holding in Construction Bank, on reports Bank of America may need an additional $34 billion in capital. [ID:nN05514181]

"The news has been pretty detrimental to CCB's shares today. Now it seems almost positive that Bank of America will dump the shares," said DBS's Lai.

CITIC Pacific (0267.HK), another underperformer, dropped 2.4 percent to HK$12.88 after former chairman Larry Yung sold 60 million shares in the steel to property conglomerate for close to $94 million.

Earlier in the week, Li & Fung (0494.HK) sold shares to its controlling shareholder to raise $350 million, while Morgan Stanley sold shares worth $111 million in China High Speed Transmission (0658.HK).

STANCHART, HSBC SHINE

HSBC Holdings (0005.HK) shrugged off concern about U.S. bank stress tests to jump 6.3 percent and finish at a 3-½ month closing high of HK$61.60 after a brokerage house upgraded the stock, and Standard Chartered's (2888.HK) stellar first-quarter performance.

HSBC shares have more than doubled in value since their brutal selloff early in March after Britain's largest lender made a massive cash call to shore up its balance sheet.

The bank's local arm Hang Seng Bank (0011.HK) jumped 10 percent.

"Except Bank of America, the feeling out there is that banks may not need to raise much money after these stress tests. HSBC for example, recently raised a big pile of money, so investors believe there is no need to worry too much," said Kenny Tang, associate director with Redford Securities.

JP Morgan upgraded the stock to neutral from its earlier underweight rating, crediting its stronger capital position and relatively inexpensive valuation.

Standard Chartered (2888.HK) jumped 7.4 percent to close at a 6-½ month closing high of HK$141 after it weathered the financial crisis to report a record first-quarter profit, reaping the benefits of a focus on Asia and a resilient loan book. [ID:nL5944160]

Another big gainer was New World Development (0017.HK), which rose 7 percent after Goldman Sachs removed it from its conviction sell list and raised its target price to HK$8.7 from HK$7.95.

The China Enterprises Index .HSCE of top mainland companies rose 1.5 percent to 9,750.21.

Fujian Holdings (0181.HK) extended its sharp rally into a second day, soaring 17.4 percent, after China's cabinet approved plans for an economic development zone in the southeastern province of Fujian to promote economic ties with Taiwan.

(Editing by Chris Lewis)