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]

The China Enterprises Index .HSCE of top mainland companies was 3.1 percent lower at 8,698.76.

Yanzhou Coal (1171.HK) fell 6.1 percent to HK$7.13 after the coal miner lowered its 2009 sales target by 6.7 percent from its 2008 sales volume after reporting a 48.5 percent drop in first-quarter profit.

FLU FEARS INFECT AIRLINES

Worries about a global swine flu pandemic boosted pharmaceuticals while beating down pork product makers, trade, travel and tourism stocks.

"This is an economy which completely opens itself up to trade and tourism, so people are a little more fearful of the flu news here," said Andrew To, sales director with Taifook Securities.

"But the reaction hasn't been completely over the top; investors are watching to see how the disease spreads and what steps are being taken to contain it."

Airline stocks were among the hardest hit with Cathay Pacific Airways (0293.HK) down 8.4 percent. Shares in Asia's No.3 airlines shed nearly 30 percent between mid-Feb and late April in 2003 during the SARS outbreak.

China's flagcarrier Air China (0753.HK) retreated 13 percent, while China Southern Airlines (1055.HK) slid 14.1 percent.

Shipping stocks sank, with bulk carrier China Cosco (1919.HK) giving up 4.8 percent and China Shipping Development (1138.HK) down 5.7 percent.

China Pharmaceuticals (1093.HK), which makes antibiotics on the mainland, soared 19.2 percent, while drugmaker Guangzhou Pharmaceutical (0874.HK) tacked on 10.2 percent.

Wuyi International Pharma (1889.HK) was among the biggest percentage gainers on the exchange with a 33.8 percent jump. Hong Kong Health Check and Laboratory Holdings 2906.HK advanced 11.1 percent.

Yurun Food (1068.HK), a manufacturer of pork products, dropped 8.8 percent, while conglomerate China Resources Enterprises (0291.HK), which has a pork producing unit, fell 5.1 percent. Analysts said this was a knee-jerk reaction to widespread concern about the virus.

(Reporting by Parvathy Ullatil; Editing by Nick Macfie)