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Australia shares flat, Chinese PMI cuts gains

SYDNEY, Oct 1 (Reuters) - Australian shares ended flat on Monday, giving up early gains after data showing China's manufacturing sector remained in contraction in September fuelled investor worries about weak global growth.

Big banks edged higher, while among the major miners BHP Billiton

added 0.2 percent and rival Rio Tinto

was flat. Mining and steel maker Arrium

jumped 25 percent after rejecting a A$1.01 billion bid by a consortium aiming to to cash in on a drop in the value of resource firms as commodites prices have tumbled.

The benchmark S&P/ASX 200 index

closed up just 1.6 points at 4,388.6, after rallying as much as 0.6 percent in early trade. The benchmark rose 7.1 percent in the third quarter, its best quarterly performance in three years.

China's official factory purchasing managers' index improved to 49.8 in September from 49.2 in August, but stayed below the 50 line that points to contraction.

Westpac led gains among the big banks, rising 0.4 percent as investors eyed the sector's strong dividend yield.

Australia's central bank holds its monthly policy meeting on Tuesday and is expected to keep the cash rate steady at 3.5 percent, although some economists see a chance of a quarter-point cut.

"The agressive interest rate cuts which have been expected perhaps are leading people to buy a few banks today and also for the dividend yield," said Chris Weston, market strategist at IG Markets.

Defensive stocks eased, with telecommunications giant Telstra

falling 1 percent, blood products maker CSL

down 0.5 percent and supermarket retailer Wesfarmers

down 1 percent.

New Zealand's benchmark NZX 50 index

finished 0.1 percent, or 4.1 points lower at 3,830.

(Reporting by Thuy Ong; Editing by Richard Pullin)

((thuy.ong@thomsonreuters.com)(+61 2 9373 1236))

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