* Asian shares ease, Shanghai tumbles on profit taking
* Fed statement awaited for rates and recovery prospects
* Oil rises towards $70 a barrel after U.S. crude stocks fall
* Yen strengthens after strong gains the previous day
By Elaine Lies
TOKYO, Aug 12 (Reuters) - Asian stocks sagged on Wednesday, with Shanghai shares tumbling to a four-week low, as investors locked in profits and waited to hear what the Federal Reserve has to say about prospects for U.S. economic recovery.
The Shanghai fall, set off by worries that a surge in Chinese shares has outrun economic recovery and that a drop-off in bank lending means less money flowing into shares, also helped the yen strengthen against the dollar.
European shares were expected to be mixed following a two-session retreat, though gains were seen likely for most exchanges, with investors awaiting the Fed outcome.
The MSCI index of Asian markets excluding Japan <.MIAPJ0000PUS> slipped 1.1 percent, still in retreat from last week's 11-month peak.
China's central bank said on Tuesday that banks extended 355.9 billion yuan ($52 billion) in new local-currency loans in July, down from 1.53 trillion yuan in June and a sharper fall than many analysts had forecast. [ID:nPEK158166].
A sizeable share of bank loans in the first half is believed to have gone into the stock market, helping push the Shanghai index up more than 80 percent as of last week.
"The rally in the (Shanghai) index has far exceeded the speed of economic recovery," said Western Securities analyst Cao Xuefeng.
"Yesterday's mixed economic data and sharp drop in bank lending heightened such worries, while weak overseas markets triggered the sell-off."
The Shanghai Composite Index <.SSEC> fell 3.5 percent on worries about a possible tightening of market liquidity following the sharp drop in July bank lending. The losses pressured Hong Kong's Hang Seng index <.HSI>, which fell 1.9 percent, coming down from a 12-month closing high the previous day.
The Nikkei <.N225> pulled back from 10-month highs, losing 1.4 percent.
Sharp Corp <6753.T> fell after an earthquake forced
supplier Corning Inc
"A fall in Chinese stocks tends to bring down Japanese stocks as well. Investors in Europe and the United States watch China when making their investment decisions, with the whole world now hugely depending on the Chinese economy," said Kenichi Hirano, operating officer at Tachibana Securities.
In Seoul, the Korea Composite Stock Price Index <.KS11> shed 0.9 percent, although shares in LCD maker LG Display <034220.KS> rose on expectations of a glass shortage after the Japanese earthquake disrupted production.
Australian stocks <.AXJO> edged higher, boosted by
Commonwealth Bank of Australia Ltd
AHEAD OF FED
The Fed started its two-day meeting on Tuesday, with expectations that it will leave benchmark interest rates near zero and let a $300 billion programme to buy Treasury securities expire on schedule in September as economic gloom lifts.
But after a report showing U.S. firms continue to cut inventories as they lack confidence in the economy, analysts expect the Fed will try to dampen speculation about higher interest rates while still supporting hopes that the makings of a recovery are at hand.
Its statement is due at about 1815 GMT.
Wall Street fell after a prominent banking analyst warned the sector's fundamentals had yet to improve and the drop in wholesale inventories raised worries about recovery as U.S. wholesalers cut inventories of unsold goods for the 10th month in a row in July. [.N]
"World share markets have been moving in tandem for a while and there's growing concern that many have been overbought, which may lead to a bit of adjustment after all the gains," said Masayoshi Okamoto, head of dealing at Jujiya Securities in Tokyo.
The yen rose against the dollar, extending gains of the previous day as investors liquidated yen short positions ahead of the Fed on the view that the Japanese currency's slide after last week's U.S. jobs data had run its course for now.
The dollar slipped 0.4 percent to 95.55 yen
The euro was steady at $1.4144
U.S. crude futures steadied below $70 a barrel
U.S. Treasury debt prices held steady after rising in the previous session, with the market waiting to see if the Fed signals it will let its Treasury buying programme expire and pausing ahead of a 10-year note auction later.
Spot gold was trading around 946.10 an ounce. (Additional reporting by Charlotte Cooper, Aiko Hayashi, Parvathy Ullatil and Claire Zhang) (Editing by Kim Coghill)