UPDATE 1-Vietnam government to buy shares to boost index

(Adds market reactions)

HANOI, March 6 (Reuters) - Vietnam said its government investment arm will buy shares in an attempt to halt a dramatic drop on the country's stock markets, helping the benchmark index rally from a 16 month low on Thursday.

The Ho Chi Minh market index .VNI climbed 4.7 percent to 610.68 points at the open on news State Capital Investment Corporation (SCIC) will step to help prop the market and restore investor confidence.

The Hanoi OTC market index .HASTCI jumped 7.01 percent to 204.79 points.

"SCIC's shares purchase is a suitable solution given the current conditions and could provide positive support to the market," Deputy Chairman of the State Securities Commission Nguyen Doan Hung said.

"This solution will be applied immediately given the fast-changing stock market," Hung added in a statement on the government's Web site (www.chinhphu.vn).

Despite Thursday's gains, the Ho Chi Minh market index has still lost about 34 percent so far this year. Domestic retail investors bailed out following a series of central bank directives to banks aimed at containing double-digit inflation dried up liquidity.

It is the worst performing market in the world this year and has fallen three times as much as MSCI's Asia excluding Japan index .MIAPJ0000PUS.

SCIC represents state-owned stakes in major corporations, including top information technology firm FPT FPT.HM, top dairy product maker Vinamilk VNM.HM and Pacific Airlines. (Reporting by Nguyen Nhat Lam; Editing by Michael Battye and Lincoln Feast)