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Tue Jul 22, 2008 4:47am EDT

* HSI hovers as investors book gains on previous rally * Lenovo slides on IBM share sale, JP Morgan downgrade * SMIC rallies 11 percent on report of stake sale

(Updates to close)

By Parvathy Ullatil

HONG KONG, July 22 (Reuters) - Hong Kong shares flitted in and out of negative territory before closing flat on Tuesday, as investors locked in gains on a four-session, 6.4 percent rally after oil prices rose, but shares in Lenovo slid after IBM sold a stake in the Chinese PC maker.

Turnover on the exchange was the third lowest this year, with investors expecting Wall Street to fall overnight after a raft of U.S. companies, including American Express , Apple and Texas Instruments announced dismal earnings growth after the closing bell on Monday.

Shares in Lenovo slid more than 5 percent after U.S. computer giant IBM sold a 1.3 percent stake in the company for around $77.3 million and JP Morgan downgraded the stock on slowing Chinese demand.

But shares in Semiconductor Manufacturing International Co. (SMIC) jumped 11 percent on a news report that Datang Telecom group may buy a 20 percent stake in SMIC, the nation's biggest contract chip maker.

The Hang Seng Index .HSI closed 5.42 points lower at 22,527.48 after vacillating between 22,690.74 and 22,393.14 earlier.

Mainboard turnover fell to HK$51.9 billion ($6.7 billion) from HK$69.6 billion on Monday.

"Wall Street looks set for a correction tonight and that seems to have made investors cautious. The rally in financial shares was not expected to last very long anyway," said Conita Hung, head of equity markets with Delta Asia Financial Group.

The China Enterprises Index .HSCE of top locally listed Chinese firms fell 0.1 percent.

CNOOC ended 0.7 percent higher but off its day's peak, after fears that a tropical storm could hit U.S. offshore oil installations sent crude over $131 per barrel.

Esprit dragged the main index lower, falling 2.3 percent after the company's deputy chairman and group CFO, John Poon, resigned with effect from July 20, ahead of the company's results in August. Analysts said the company had denied any connection between Poon's resignation and a potential earnings disappointment.

Shares in the smaller of China's two mobile network operators China Unicom slid 2.3 percent after it reported a significant decline in CDMA subscriber additions in June.

The China Enterprises Index .HSCE of top locally listed Chinese firms fell 0.12 percent.

Higher oil prices ended a rally in airline stocks, with Air China giving up 3.4 percent and Cathay Pacific Airways dropping 3.2 percent.

Aluminium Corp of China (Chalco) , the country's largest producer of the metal, fell 3.3 percent after Goldman Sachs cut its rating on the stock to neutral from buy on Monday on expectations of another power tariff hike by Beijing.

On Monday, Chalco said it may lose 30,000 metric tonnes of output after it halted some capacity at two ventures in Shanxi province because of a power shortage.

Cement stocks took a beating after Goldman Sachs cut Anhui Conch and rival China National Building Materials to sell from neutral on Monday, citing potential difficulties in passing on climbing coal and power prices.

Anhui Conch slid 6 percent, adding to Monday's 6 percent decline. CNBM fell 4.4 percent.

Zhejiang Glass Co Ltd jumped 6.8 percent after rallying 13.6 percent earlier in the day.

The company said its net profit for the first half of 2008 was likely to double, owing to a relatively high return from its unit Qinghai Soda Ash Co Ltd. The company posted a 100.28 million yuan ($14.69 million) profit in the first half of 2007. (Editing by Anne Marie Roantree)