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China shares rally, spur Hong Kong on hopes for market boosting steps

* HSI up 0.5 pct but off earlier highs, drop in euro weighs

* CSI300 up 2.2 pct, Shanghai Comp up 2 pct

* Sinopec shares near 5-month high, lead energy sector rally

* ZTE shares slump 5.6 percent, extend drop on U.S. Congress report

* China Molybdenum triples in Shanghai IPO debut, shares halted

(updates to close) By Vikram Subhedar

HONG KONG, Oct 9 (Reuters) - China shares posted healthy gains on Tuesday and lifted Hong Kong markets to near a five-month high as hopes of more market-supporting measures from Beijing spurred rallies in large-cap banking and energy shares.

The Hang Seng rose 0.5 percent but closed off earlier highs, which were the strongest levels since early May. A sudden drop in the euro after China's onshore markets had closed triggered a pullback in Asian markets that weighed on Hong Kong.

Fresh worries about Greece and uncertainty about when Spain will apply for a bailout saw the euro fall from recent highs, dragging down other risky assets.

Earlier, The CSI300 index of top Shanghai and Shenzhen listings closed up 2.2 percent while the Shanghai Composite rose 2 percent, with gains coming in strong volumes in a sign that investors were returning to the market.

That supported shares of Chinese banks and oil producers in Hong Kong, which carry the biggest weightings in the local benchmark indexes, and helped the China Enterprises index

close up 1.3 percent.

A report in the China Daily said market regulators had pledged to speed up approvals for quotas for Qualified Foreign Institutional Investors (QFIIs), the only way for offshore investors to directly access China's domestic markets.

"A lot of investors are underweight China in their portfolios so any talk on QFII is likely to encourage them to start getting involved again," said Tom Kaan, a director at Louis Capital Markets in Hong Kong.

The report comes after Chinese regulators cleared the way for overseas investors to buy more than $30 billion worth of stocks and bonds in China, exceeding the previous programme limit, as Beijing seeks to attract more foreign portfolio investors.

It also comes amid speculation of more government funds being put to work to boost investor confidence.

China's largest listed broker Citic Securities rose 3.2 percent in Shanghai. Industrial Securities

rose 10 percent, the biggest gainer on the CSI300, while Haitong Securities rose 3.5 percent.

In a sign of returning risk appetite, shares of China Molybdenum Co Ltd nearly tripled after listing in Shanghai before trading was suspended.

But there was no respite for ZTE Corp shares, which extended losses to fall 5.6 percent after a U.S. congressional report said the company could pose a security threat dashing hopes of expansion plans.

ZTE shares have lost more than 11 percent since last Friday's close.

BANKS, OIL PRODUCERS UP

ICBC shares rose 1.5 percent and were the top boost on the Hang Seng after a report that China's Central Huijin Investment, a state-owned asset management company, had bought 6.3 million shares of the bank in the third quarter.

That led to speculation that Huijin may lift its stake in other Chinese banking shares, traders said, as authorities try to restore confidence among the mainland's retail investors.

"Markets have gotten caught up in this talk of government funds buying banking shares before and I'd be careful about chasing this move," said Kaan.

Chinese financials listed in Hong Kong are flat for the year, compared with a 14.2 percent rise on the Hang Seng.

Energy shares, in particular oil producers which have suffered over the past week as crude prices weakened, also recovered. Sinopec surged 3.8 percent to break above its Aug. 17 high, while Petrochina rose 2.1 percent.

Shares of department store operator Lifestyle International Holdings jumped 4.9 percent, recovering from Monday's weakness in retail shares, after the company said it may spinoff its property business.

(Editing by Kim Coghill)

((vikram.subhedar@thomsonreuters.com)(+852 28436975))

Keywords: MARKETS HONGKONG CHINA STOCKS/UPDATE 2