HK shares snap 6-day slump but HSBC weighs down index

* HK shares turn course after six-day slide
* China banks recover after RBS sells stake in BOC
* HSBC drops after broker cuts profit estimate,target price
(Updates to close)
By Parvathy Ullatil
HONG KONG, Jan 14 (Reuters) - Hong Kong shares pared early gains to finish 0.3 percent higher after a sharply lowered target price and earnings estimates on HSBC Holdings sent shares in Europe's top bank to their lowest in more than seven years.
Index heavyweight HSBC (0005.HK) tanked 4.1 percent to HK$70, even slipping below that level at one point earlier Wednesday, after Morgan Stanley cut its target price by 31 percent to HK$52.
The U.S. investment bank cut its profit estimate for the British-based lender by 17 percent for 2008 and 39 percent for 2009 and expects the bank to halve its dividend. Morgan Stanley also predicts a $20 billion to $30 billion capital need at HCBC.
"If HSBC cut its dividend by half, its dividend yield will fall to 5 percent from 10 percent and given the bank's huge exposure to UK and U.S. market, 5 percent yield is not attractive any more," said Steven Leung, director with UOB Kay Hian.
"If the stock can't recover to HK$72 or HK$73 by tomorrow the situation can get pretty ugly."
Slumping HSBC shares offset gains in Chinese banking counters after the third equity selldown in a major lender this year eliminated some of the overhang on the sector. [ID:nHKF079859]
The benchmark Hang Seng Index .HSI closed 36.56 points higher at 13,704.61, snapping a six-day slide, its longest since September 2008.
But the index finished well off its early highs as HSBC extended losses in the afternoon session, dragging down with it shares in local arm Hang Seng Bank (0011.HK) which fell 4 percent.
Mainboard turnover rose to HK$66.2 billion ($8.5 billion) from HK$47.3 billion on Tuesday. The China Enterprises Index .HSCE of top mainland firms outperformed, climbing 2 percent to 7,219.04.
CHINA BANKS OUTPERFORM
(3988.H Beijing-controlled Bank of China K) rose 2.7 percent after Royal Bank of Scotland (RBS.L) sold $2.4 billion worth of shares, its entire holding in China's No.2 lender