* China shares down 19 pct from 14-month peak intraday
* Air China, CITIC Pacific drop after Cathay Pacific deal
* China Everbright debut fails to impress (Updates to close)
By Parvathy Ullatil and Claire Zhang
HONG KONG, Aug 18 (Reuters) - China shares recouped some of their recent steep losses in skittish trade on Tuesday, propping up Hong Kong-listed stocks, on bargain buying in some counters.
During a see-saw battle that pushed the market in and out of positive territory, Shanghai-listed shares tumbled to a two-month low, dropping as much as 19 percent from the year's high, hit two weeks ago.
The slide has mainly been due to profit-taking after a 90 percent market rally earlier this year got far ahead of China's economic recovery. The index was also under pressure from worries about a flood of new shares and weakening overseas markets.
Investors also fretted about big institutional buyers pulling out of the market. Chinese insurers are close to their permissible investment limits in equities, while the National Social Security Fund reduced its net exposure to Shenzhen-listed A shares by 664 million yuan ($97.17 million) in July, JP Morgan said in a note on Tuesday.
Analysts said the two-week slump had pushed valuations of Chinese stocks to much more reasonable levels, and the potential for a further slide would be more limited in the near term.
"What we've been seeing is a correction in a bull market. There is still money waiting to be invested in the market and earnings growth will drive gains going forward," said Wilfred Sit, regional chief investment officer, Asia Pacific with emerging markets fund manager Mirae Asset.
AIR CHINA, CITIC PACIFIC SLIP AFTER CATHAY DEAL
Air China shares tumbled nearly 10 percent in early trade as investors feared China's biggest airline may have paid too much and taken on debt in raising its stake in Hong Kong carrier Cathay Pacific. But the stock trimmed losses to end just 2 percent lower at HK$4.48.
"It's disappointing that Air China failed to capture good bargain opportunities during the drastic global downturn," said Citigroup analyst Ally Ma in a note to investors.
CITIC Pacific, which sold a 12.5 percent stake in Cathay to Air China for $808 million, dropped 1.3 percent, while Cathay Pacific shares rose 1.4 percent.
Goldman Sachs raised its estimate for CITIC Pacific's 2009 per share earnings by 35 percent to factor in the disposal gain, but it cut its 2010 estimates by 5 percent and 2011 estimates by 11 percent to account for the lack of profit contribution from Cathay.
The benchmark Hang Seng Index finished 0.8 percent higher at 20,306.27, recovering slightly from Monday's 3.6 percent slide, led by a 1.9 percent bounce in HSBC.
"The market's not cheap anymore. It's risky but the downside risk is not a lot. There are signs that the economy is turning around, but how strongly it's turning is what people are nervous about," said Howard Gorges, vice-chairman with South China Brokerage.
Consumer goods exporter Li & Fung, among the biggest gainers on the blue-chip index, climbed 6.4 percent to HK$28.45 after BNP Paribas upgraded the stock to a "buy" rating from "reduce" amid an improving retail environment in the United States. BNP raised its target price on the stock to HK$30.
The China Enterprises Index, which represents top locally listed mainland Chinese stocks, rose 0.5 percent to 11,448.66.
EVERBRIGHT DEBUT LESS-THAN-STELLAR
The Shanghai Composite Index closed 1.4 percent higher at 2,910.884 points led by steel and power stocks, but was still down more than 16 percent from its high for the year.
"The technical charts indicated Tuesday's rebound was quite solid," said analyst Li Wenhui at Huatai Securities in Nanjing.
"But thin turnover indicated many investors were still cautious not to rush into the market as sentiment has been hurt by the recent slump."
Turnover for Shanghai A shares dropped to 117.4 billion yuan ($17.2 billion) from Monday's 136.9 billion yuan while gaining Shanghai A shares outnumbered losers by 709 to 223.
China Everbright Securities, which raised 11 billion yuan ($1.6 billion) in its Shanghai IPO, rose only 30 percent in its Shanghai debut to close at 27.40 yuan, less robust than last month's sizzling debuts after a market rally stalled.
Baoshan Iron and Steel closed up 2.96 percent at 7.66 yuan, while Datang Power raced up its 10 percent daily limit to 10.68 yuan, mainly buoyed by technical buying.
The index tumbled 5.8 percent on Monday, its biggest daily percentage drop in nine months. Analysts said the index was expected to move in a relatively narrow range of 2,800 to 3,100 points over the next week or two.
Brokerage shares sank as investors worried that the market's weakness would hit their bottom lines. Everbright's rivals, CITIC Securities and Haitong Securities, sank around 4 percent.
Southwest Securities dropped its 10 percent daily limit to 18.02 yuan after unveiling an A-share placement plan to raise up to 6 billion yuan to supplement its capital base. (Editing by Edmund Klamann and Chris Lewis)