* HK shares drop for 2nd day, end at 2-week low
* China banks, airlines gain on M&A talk
* A-share/H-share premium gap at 31 pct, 3-½ week high
(Updates to close)
By Parvathy Ullatil & Claire Zhang
HONG KONG/SHANGHAI, June 9 (Reuters) - Hong Kong stocks sank for a second straight session on Tuesday as big gainers in the recent rally were sold down on worries the market had run ahead of itself in recent weeks, distorting valuations.
Stocks in Shanghai rose 0.71 percent to a 10-month closing high on Tuesday, with financial and airline shares strong after news of possible high-profile acquisitions in those sectors.
Two days of divergent moves in the markets pushed up the premium gap between yuan-denominated A-shares and their Hong Kong-listed H-shares counterparts to a 3-½ week high of 32 percent.
But turnover in both markets continued to drift lower as investors held off on buying, anticipating a round of profit-taking before the markets resumed an upward path.
"We have certainly run up quite a lot on expectations of good news and now its time to pause and see what that good news might be," said Howard Gorges, vice-chairman at South China Brokerage.
HK SHARES AT TWO-WEEK LOW
The benchmark Hang Seng Index finished down 1.1 percent at 18,058.49, a two-week closing low, after dropping to 17,710.45 earlier.
"We've been seeing mixed economic signals from the United States, corporate profit warnings and weakness in European markets. There is real concern that the market has been overstretched after weeks and weeks of rallies," said Alex Tang, research director with Core Pacific-Yamaichi International.
The index, which has added a quarter to its value since the beginning of 2009, is currently trading at over 16 times the estimated earnings of its constituents in 2009.
Turnover slipped to HK$71.9 billion ($9.2 billion) from HK$73.7 billion on Monday.
Big gainers in the recent rally took a beating on Tuesday with Tencent, which in May piled on more than 25 percent, dropped 4.4 percent to HK$85.70.
Bank of East Asia, which was lowered to an "underweight" rating from "neutral" by HSBC, dropped 5.4 percent to HK$25.40.
The China Enterprises Index of top mainland companies shed 1.5 percent to 10,504.32.
China Huiyuan Juice retreated after the Financial Times reported that U.S. private equity fund Warburg Pincus had ended its investment in China's top juice producer, becoming the first big stakeholder to pull out of the company after the collapse of Coca-Cola's $2.4 billion takeover offer.
The stock was down 8.3 percent at HK$5.96.
Chinese consumer goods exporter Li & Fung shed 2.5 percent to HK$23.10 as the fate of a customer, German retailer Arcandor, hung in the balance.
SHANGHAI STOCKS AT TEN MONTH HIGH
The Shanghai Composite Index ended up 19.551 points at 2,787.887, rebounding from a 1 percent loss at the midday break.
Gaining Shanghai A shares outnumbered losers by 471 to 434, while turnover in Shanghai A shares shrank to 132.9 billion yuan ($19.5 billion) from Monday's 138.7 billion yuan.
Financial shares were strong for a second day after news of a possible tie-up between Ping An Insurance and Shenzhen Development Bank, whose shares remained suspended as the market awaits confirmation of a deal.
China Life Insurance, a Ping An rival, jumped 5.8 percent to 26.30 yuan, while Haitong Securities climbed 7.12 percent to 16.24 yuan.
Air China surged 7.8 percent to 6.88 yuan. China Eastern Airlines and smaller Shanghai Airlines were suspended on Monday after media said the two loss-making carriers were close to a merger agreement.
"The high-profile tie-ups heightened investor expectations for consolidation in those industries, while ample liquidity helped the index off the lows again," said Haitong Securities analyst Zhang Qi.
In a sign that the flow of liquidity has remained generous in recent weeks, banking sources told Reuters late on Monday that new yuan loans by Chinese banks exceeded 600 billion yuan in May.
Chinese liquid crystal display maker BOE Technology Group raced up its 10 percent daily limit to 5.05 yuan after saying it had raised 12 billion yuan in a share placement.
Analysts said it was the biggest fund-raising move in the stock market so far this year and the price was attractive, but investors were still wary about risks in both the stock market and the industry.
Chinese tourism and property development company Shenzhen Overseas Chinese Town Holding soared its 10 percent limit to 17.93 yuan after a halt in its shares since May 18. The benchmark index is up 5 percent over the same period.
The company said it would place 486.39 million shares with its parent company, from which it will purchase tourism and property-related assets valued at 7.37 billion yuan.
(Editing by Edmund Klamann and Chris Lewis)