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.

Li Ka-shing's Hutchison Telecommunications (2332.HK) dropped 44.9 percent to HK$1.33 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 3.8 percent lower at 8,641.43.

Yanzhou Coal (1171.HK) fell 5.8 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 the possibility of a global swine flu pandemic boosted pharmaceuticals while beating down pork product makers, trade, travel and tourism stocks.

"This is an economy that 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 percent. Asia's No.3 airline shed nearly 30 percent between mid-Feb and late April in 2003 during the SARS outbreak.

China's flagcarrier Air China (0753.HK) retreated 12.8 percent, while China Southern Airlines (1055.HK) slid 14.5 percent.

Shipping stocks sank, with bulk carrier China Cosco (1919.HK) giving up 7.1 percent and China Shipping Development (1138.HK) down 9.9 percent.

China Pharmaceuticals (1093.HK), which makes antibiotics on the mainland, soared 13.2 percent, while drugmaker Guangzhou Pharmaceutical (0874.HK) advanced 13.4 percent.

Wuyi International Pharma (1889.HK) was among the biggest percentage gainers on the exchange with a 31 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 10.2 percent, in a knee-jerk reaction to widespread concern over the virus even though there no evidence to suggest the flu could spread from eating pork.

(Reporting by Parvathy Ullatil; Editing by Chris Lewis)