* Cash rate falls to lowest since before peak of squeeze * Stocks fall as focus shifts back to economy worries * Cash rate seen continuing gradual decline, stocks consolidate By Lu Jianxin and Kazunori Takada SHANGHAI, July 1 (Reuters) - China's key short-term lending rate on Monday fell to its lowest level since before the peak of the last month's cash crunch, while stocks slipped back as traders shifted their focus back to the economy which showed further signs of weakness. The weighted average for the benchmark seven-day repo rate fell 71 basis points to 5.45 percent around midday, its lowest since June 20, though still above its usual range of 3-4 percent. The overnight rate fell by 49 basis points to 4.47 percent. "Market liquidity conditions have improved greatly as seasonal demand for the end of the quarter is now over," said a money trader at a Chinese bank in Shanghai. But she added that rates would remain relatively high over the next two weeks due to cash demand for dividend payments by banks. The weighted-average seven-day rate hit a record 11.62 percent on June 20, though some trades were seen as high as 28 percent, as the central bank allowed conditions to tighten and panic grew in the market about a potential credit crunch, sending shares lower. But the stock and cash markets calmed down late last week after the People's Bank of China pledged to provide emergency liquidity to any bank short of cash, and revealed that it had already done so for some institutions. With money market rates expected to gradually ease towards 4 percent by mid-July, stock investors were focusing their attention back to the economy. "The market will see a sustained consolidation period in the near term," said Chen Huiqin, senior stock analyst at Huitai Securities in Nanjing. "This is because regulators appears to be determined not to usher in new economic stimulative measures. Instead, they have laid emphasis on economic structural reforms. Without major government stimulative measures, the market will not see a bull run." Reinforcing worries about tepid growth in the second quarter, China's official purchasing managers' index (PMI) slipped to 50.1 in June from 50.8 in May, a survey showed on Monday. The CSI300 index of the largest mainland counters ended the morning session down 1.1 percent as investors cashed in on rally in financial shares on Friday. The sub-index of financial shares was down 1.5 percent after rising 3.5 percent on Friday. Trading was volatile with the index briefly drifting into positive territory. "Overall, the large-cap index should have limited room to plunge again as the price-to-earnings (PE) ratio of these heavyweights is now very low," said Zhang Qi, analyst at Haitong Securities in Shanghai.