* HSI closes below 20,000 points for first time in 17 months
* Property stocks slump on Goldman Sachs downgrade
* Utilities eke out gains on safe haven appeal
(Updates to close)
By Parvathy Ullatil
HONG KONG, Sept 5 (Reuters) - Hong Kong shares shed 2.2 percent on Friday, with the main index giving up all the gains made in a stellar 2007 rally as property stocks recorded their biggest single-day falls in six months on a broker downgrade.
"That the index fell below 20,000 today was a disappointment. It had become a crucial psychological support for local investors. And the momentum in the market is very different from the last time we were at this level," said Benjamin Collett, head of hedge funds sales trading at Daiwa SMBC.
"We are going to need more than optimism to have a convincing rally from here. There is still an unjustified bias towards commodities and an universal hatred of financial stocks and these issues need to be resolved."
Local property stocks slumped after Goldman Sachs cut its ratings on the sector to cautious from neutral on Friday after factoring in a potential narrowing in primary market price premiums over secondary market prices.
Hong Kong's largest real estate developer Sun Hung Kai Properties (0016.HK: Quote, Profile, Research, Stock Buzz) tumbled 6.1 percent after Goldman Sachs downgraded the stock to neutral from buy.
The brokerage cut its rating on Henderson Land (0012.HK: Quote, Profile, Research, Stock Buzz) to sell from neutral, sending the stock down 6.2 percent, while Li Ka-shing's property flagship Cheung Kong Holdings (0001.HK: Quote, Profile, Research, Stock Buzz) fell 5.7 percent, its biggest drop in more than seven months.
The benchmark Hang Seng Index .HSI closed down 456.20 points at 19,933.28, its lowest close in 17 months, but still well off the day's low of 19,708.39.
The Hang Seng Index gained 39 percent in 2007, peaking at nearly 32,000 points in October last year.
An unexpected increase in U.S. jobless claims reported overnight sent Wall Street shares tumbling and put investors on their guard ahead of key August non-farm payroll report due tonight.
"A lot of this negative sentiment is coming from the U.S. and Europe where they are already dealing with a slowdown. It is true that Asia is still growing but we have to be realistic and say that this is bad time for the global economy," said Andrew Sullivan, sales trader with Mainfirst Securities.
"Investors are reappraising their outloook for global economic growth, rethinking what has happened so far to understand what will happen going ahead," he added.
Mainboard turnover rose to HK$65.3 billion ($8.4 billion) from HK$56.5 billion on Thursday.
Index heavyweight and Europe's largest lender HSBC Holdings (0005.HK: Quote, Profile, Research, Stock Buzz) slid 3.3 percent following the negative sentiment towards its U.S. peers.
Weak oil prices beat down commodity counters, with Asia's largest oil & gas company PetroChina (0857.HK: Quote, Profile, Research, Stock Buzz) dropping 2.6 percent on Friday.
Utility stocks eked out gains as investors sought safe havens. CLP Holdings (0002.HK: Quote, Profile, Research, Stock Buzz) gained 2.9 percent while Hongkong Electric (0006.HK: Quote, Profile, Research, Stock Buzz) was up 1.2 percent.
Fashion brand Esprit Holdings (0330.HK: Quote, Profile, Research, Stock Buzz) rose 1.9 percent.
Merrill Lynch upgraded Esprit to buy from underperform on Thursday following a 27 percent dive in its share price from August 27, when it reported disappointing profit growth for the first half and cautioned investors about the deteriorating retail market in Europe.
The China Enterprises Index .HSCE of top locally listed mainland Chinese firms fell 2.1 percent, tracking a 3.3 percent drop on the Shanghai bourse.
China Communications Constructions (1800.HK: Quote, Profile, Research, Stock Buzz), the nation's top builder of ports and highways, fell another 4.5 percent on top of Thursday's 13.7 percent slump after three brokers downgraded the stock in the last two days.
The company is expected to post disappointing half-year earnings and its port and road construction margins will come under further pressure amid rising raw material costs, said analysts.
(Reporting by Parvathy Ullatil; Editing by Jonathan Hopfner)
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