Financials lift HK shares 3.9 pct;Li & Fung surges

* Banks soar on U.S. government takeover of mortgage giants

* Li & Fung sharply higher after Temasek stake buy

* CITIC Resources rallies on spin-off news

(Updates to mid-day)

By Parvathy Ullatil

HONG KONG, Sept 8 (Reuters) - Hong Kong shares rose 3.9 percent on Monday, rebounding from a 17-month low, with sentiment towards financials lifted by the federal takeover of troubled U.S. mortgage lenders Fannie Mae (FNM.N) and Freddie Mac (FRE.N).

Shares in HSBC Holdings (0005.HK), Europe's largest bank, jumped 4.5 percent after the U.S. government took control of the housing finance giants to bolster the ailing housing market.

Mainland Chinese banks which own bonds issued by the beleagured home financers also pushed ahead, with China Construction Bank (0939.HK) gaining 4.3 percent and ICBC (1398.HK) 4.7 percent higher.

"There is hardly any equity exposure of Asian banks ex-Japan in Freddie and Fannie. But investors wee concerned about the mark-to market losses in debt and MBS," said Todd Dunivant, head of regional banks research with HSBC.

"Equity losses are much easier to keep track of and since the shares have fallen 90 percent already even if it goes down to zero value, we don't have a very long way to go."

Bank of China (3988.HK), which has been tipped to have the greatest exposure to Freddie and Fannie debt among Chinese lenders, rose 5.2 percent. China's third largest lender cut its debt and MBS holdings in the U.S. firms to under $13 billion by end-August from $17.3 billion at the half-year mark.

The benchmark Hang Seng Index .HSI ended the morning session 770.74 points higher at 20,704.02 after opening 4.6 percent higher. The index had closed below 20,000 points for the first time since April 2007 on Friday.

The market was largely indifferent to the results of legislative elections in which pro-democracy parties scored a surprise success in the politically stable Chinese territory, said brokers.

Mainboard turnover rose to HK$38.2 billion ($4.9 billion) from HK$30.8 billion at mid-day on Friday.

Li & Fung (0494.HK), which supplies consumer goods to U.S. retail giant Wal-Mart, jumped 10.2 percent after the company said it would sell $500 million worth of new shares to a wholly-owned unit of Temasek [ID:nHKF079485].

The exporter said the proceeds would be used to fund acquisitions when opportunities arose.