* HK, Shanghai shares edge lower ahead of year-end
* Hong Kong-listed auto stocks extend gain
* China Rare Earth rises to six-week high (Updates to midday)
By Donny Kwok and Samuel Shen
HONG KONG/SHANGHAI, Dec 30 (Reuters) - Hong Kong and Shanghai stocks slipped in thin trading on Thursday amid investor caution as the market struggled to find its feet amid tightening concerns during the last few trading days of 2010.
Financials and property shares led the decline, sending the benchmark Shanghai Composite Index down 0.4 percent to 2,741.8 points by the midday break, extending the downward trend that was triggered by the central bank's Christmas Day interest rate hike.
Banking and property stocks, the sectors most vulnerable to monetary tightening, continued to slide after Wednesday's pause, despite their record low valuations.
"Cheap as they are, investors are not buying because of policy uncertainties ahead," said a trader at Lai Sun Group in Shenzhen who declined to be identified. "Many traders are choosing to stay on the sidelines toward year-end to avoid potential risks."
In a sign that Beijing's tightening could start to slow economic growth, HSBC's China Purchasing Manager's Index -- a measure of manufacturing activity -- fell to a three-month low in December as output and new orders eased.
The Chinese export-oriented manufacturing sector could suffer further next year on signs that the authorities are ready to accelerate yuan appreciation, a move that would hurt exporter margins.
China's yuan hit a record high against the dollar on Thursday, while a senior central bank official was quoted by official media as saying that a gradual and modest appreciation of the yuan would be good for China's economy.
Developers fell amid fears that China would levy a property tax as soon as next year, and after a commentary published in the official China Securities Journal saying that government steps to cool red-hot property prices would eventually cap rises in real estate prices.
Shenzhen-listed China Vanke Co Ltd, the country's top listed developer, fell 2.2 percent.
Banking stocks, which have been the main drag on the market this week, continued to fall on concern over further tightening, as Bank of China forecast in a research report on Thursday that China would raise official lending and deposit rates at least three times in 2011.
Industrial and Commercial Bank of China Ltd, China's biggest lender, was down 0.2 percent.
HONG KONG EDGES DOWN, AUTO STOCKS EXTEND GAIN
The benchmark Hang Seng Index was down 0.13 percent at 22,938.88 by the midday trading break. The China Enterprises Index of top locally listed mainland Chinese companies had gained 0.25 percent to 12,539.69.
"Although concern over interest rate rises has been temporarily removed, the market is still mixed as trade remains thin," said Andrew To, a sales director at Haitong Securities.
Tencent Holdings Ltd, China's largest Internet company, fell 1.3 percent, and China Life Insurance Co Ltd was down 0.2 percent.
"Since the downside risk is limited after the recent selloff, the market may gain support as investors look for bargains," To said, adding that he expected the blue chip index to rise above 23,000 points before the end of the year.
Industrial and Commercial Bank of China Ltd gained 0.53 percent.
China Pacific Insurance (Group) Co Ltd, the most heavily traded stock on Thursday morning, rose 2.7 percent. A trader said block deals valued at about HK$6.8 billion were noted in early trading, helping to boost market turnover to HK$30.2 billion by midday.
Auto counters extended gains from the previous session despite China's plan to end tax incentives for small cars on Jan. 1 and restrictions on new car registrations in Beijing. Brilliance China Automotive Holdings Ltd, which rebounded 4.8 percent on Wednesday, climbed 2.6 percent. Dongfeng Motor Group Co Ltd rose more than 1 percent, and Guangzhou Automobile Group Co Ltd gained 0.98 percent.
China Rare Earth Holdings Ltd rose 6.9 percent to its highest in more than six weeks, before easing to HK$3.71, up 3.1 percent. The stock jumped more than 16 percent on Wednesday after China effectively cut export quotas by 35 percent for the first half of 2011 further shrinking supplies of metals needed to make a range of high-tech products. (Editing by Chris Lewis)