HK shares pare gains as banks bow to profit taking

* CNOOC, China Shenhua rally after strong third quarter

* HSBC drops 6.9 pct after 20 pct rally, trimming HSI rally

* Bank of China drops 3.4 pct ahead of earnings (Updates to close)

By Parvathy Ullatil

HONG KONG, Oct 29 (Reuters) - Hong Kong shares rose 0.8 percent on Wednesday, building on their biggest rally in more than a decade, as investors scooped up energy stocks like CNOOC (0883.HK: Quote, Profile, Research, Stock Buzz) after crude prices snapped a three-day losing streak.

But index heavyweight HSBC Holdings (0005.HK: Quote, Profile, Research, Stock Buzz) slid 4.3 percent, trimming early sharp gains on the main index, as investors locked in profits after shares of the global lender surged 20 percent on Tuesday.

"Definitely stocks are cheap at current levels, but investors lack confidence in the market so we could see many such days of high volatility. But the market will only move sideways ultimately in the absence of a big breakout event," said Alex Tang, research director with Core Pacific-Yamaichi International.

The Hang Seng Index .HSI closed 105.78 points higher at 12,702.07, led by a 10.8 percent jump in CNOOC (0883.HK: Quote, Profile, Research, Stock Buzz), China's top offshore oil and gas producer. CNOOC said on Tuesday its third-quarter revenue jumped 69 percent to 30.9 billion yuan ($4.5 billion). [ID:nHKG95195]

The index hit an intra-day high of 13,307.52, but retreated as investors worried whether this week's sharp rally would last. The benchmark is still down 52 percent so far this year.

Tang expect the HSI to range between 11,000 points and 14,000 points in the near term.

Mainboard turnover fell to HK$59.2 billion ($7.6 billion) from HK$66.1 billion on Tuesday.

Shares in Angang Steel (0347.HK: Quote, Profile, Research, Stock Buzz) (000898.SZ: Quote, Profile, Research, Stock Buzz), one of China's top three producers of the metal, soared 13.9 percent after its parent company said it would raise its stake in the listed firm. [ID:nHKF079658]

"Long-term funds are putting their money to work, buying up shares after the steep drops," said Andrew Sullivan, sales trader with Main First Securities

"But the sustainability of this rally depends on a lot of variables, including rate decisions from the Fed and Bank of Japan, as well as a whole slew of economic indicators from the U.S," said Sullivan.

Market watchers said that in the aftermath of Hungary's $25.1 billion rescue plan from the IMF and EU, policymakers across the world may be spurred into announcing another concerted rate reduction. [ID:nPEK140633]

But Hong Kong is not expected to follow suit as interbank rates in the city remain high, not giving the central bank enough room for another rate cut.

The China Enterprises Index .HSCE of top locally listed mainland Chinese companies gained 1.8 percent to 5,786.71.

China Shenhua Energy (1088.HK: Quote, Profile, Research, Stock Buzz), the world's most valuable coal miner, shot up 11.6 percent after it posted a 48 percent increase in third-quarter net profit thanks to higher output and increased price of the commodity.

HSBC upgraded the stock to overweight from neutral on limited earnings downside and high earnings visibility.

Other energy stocks tracked a 6 percent jump in crude oil prices on Wednesday after surging equity markets drew investors back into beaten down, riskier assets.

Asia's top oil and gas producer, PetroChina (0857.HK: Quote, Profile, Research, Stock Buzz), advanced 5.8 percent ahead of its earnings due later in the day, while China Coal Energy (1898.HK: Quote, Profile, Research, Stock Buzz) added 10 percent.

But Bank of China (3988.HK: Quote, Profile, Research, Stock Buzz) slid nearly 3.4 percent as investors awaited its earnings later in the day.

Shares in Tencent (0700.HK: Quote, Profile, Research, Stock Buzz), which owns China's largest online messaging service, rallied 11.4 percent after Goldman Sachs raised its rating on the Chinese internet and media industry to attractive from neutral, citing robust growth expectations in coming years.

China's largest e-commerce firm, Alibaba.com (1688.HK: Quote, Profile, Research, Stock Buzz), advanced 2.7 percent.

(Reporting by Parvathy Ullatil; Editing by Kim Coghill)