* HSI -1.3 pct, H-shares -2 pct, CSI300 -1.4 pct
* Italy's political crisis sparks risk-off mode in Hong Kong
* Recent record China fund drain not tightening: state media
By Clement Tan
HONG KONG, Feb 26 Hong Kong shares sank to their lowest close this year on Tuesday, with financials and other growth-sensitive sectors the bigger losers as Italy's political uncertainty made investors wary of risky assets.
The mainland markets shed midday gains and closed at their lowest in more than a month, with the property, premium alcohol and railway sectors hurt by local media reports of policy rumblings before next week's annual parliamentary meetings.
The Hang Seng Index fell 1.3 percent to 22,519.7, its lowest closing since Dec. 21. The China Enterprises Index of the top Chinese listings in Hong Kong slid 2 percent.
Short selling accounted for 12 percent of total turnover in Hong Kong on Tuesday, according to traders. This is above the historical 8 percent average and the highest in at least three months.
The CSI300 of the top Shanghai and Shenzhen listings dropped 1.4 percent to its lowest close since Jan. 17. The Shanghai Composite Index shed 1.4 percent to its lowest close since Jan. 25.
"This is not a good entry point for those who have missed the rally at the start of the year," said Hong Hao, Bank of Communication International's chief strategist.
He added that uncertainties over post-election Italy, the continuation of U.S. quantitative easing and Japan's new central bank governor will likely rise and could roil markets in coming weeks.
Investors will also be watching comments from Federal Reserve Chairman Ben Bernanke at a two-day congressional testimony starting later on Tuesday that will subject its bond-buying programme to tough scrutiny and gauge his confidence in the resilience of the U.S. economy.
Hong said expectations for China's parliamentary meetings "are also too high. The meetings will be about the big picture and longer-term goals. Specific details are highly unlikely."
The annual Chinese People's Political Consultative Conference and National People's Congress, where Xi Jinping is expected to be confirmed as China's president, start in Beijing on March 3 and 5, respectively.
On Tuesday, railway counters slid after the Guangzhou-based 21st Century Business Herald newspaper reported that a plan to merge China's railways ministry with the communications ministry has been submitted for consideration.
China Railway Construction fell 3.4 percent in Shanghai and 2.7 percent in Hong Kong. China Railway Group slid 3.3 percent in Shanghai and 2.7 percent in Hong Kong.
Chinese insurers sank after local media, citing data from the insurance regulator, reported that premium income in January declined 2.5 percent from a year earlier to 125.5 billion yuan (US$20.12 billion), the first fall in seven years.
China Life Insurance , the country's largest insurer, slid 3 percent in Hong Kong to its lowest close since Dec. 4. It has fallen nearly 17 percent from a Jan. 7 peak. China Life's Shanghai listing shed 1.9 percent on Tuesday.
Shares of HSBC Holdings, Europe's largest bank, fell 1.4 percent to their lowest since Jan. 16 and was the top drag on the Hang Seng Index.
Premium alcohol producer Kweichow Moutai went down 2.1 percent in Shanghai, while smaller rival Wuliangye lost 2.3 percent in Shenzhen after the official Xinhua news agency said the government planned to toughen anti-corruption rules. The liquors are popularly given as gifts.
NO CHINA TIGHTENING, YET
Strength in smaller banks accounted for early gains on mainland indexes, but gains came off in the afternoon. Still, Ping An Bank jumped 4.2 percent in Shenzhen, while China Minsheng Bank rose 0.6 percent after local media reported both stopped mortgage lending in Beijing.
The Chinese property sector was further roiled on Tuesday by a report in the official Shanghai Securities News that the central government will release detailed property market regulations soon.
China Vanke sank 1.7 percent in Shenzhen and has now slumped 14.6 percent from a Jan. 30 peak on fears of further tightening in the sector after recent home-price rises.
Tightening fears were further fanned when the central bank last week drained a record 910 billion yuan from the banking system. Official media moved on Tuesday to dispel those fears.
The official Shanghai Securities News reported that the suspension of fund injections this week does not mean China will tighten monetary policy as the economic recovery is not solid.
In a report on Tuesday, brokerage CICC said last week's move was in response to the ultra-loose money supply conditions before Lunar New Year, but the draining of funds was a warning against the high growth of informal financing in January.