* HK, Shanghai shares edge higher ahead of year-end
* Auto counters sink in Shanghai, rise in HK
* China Rare Earth at six-week high (Updates to close)
By Donny Kwok and Samuel Shen
HONG KONG/SHANGHAI, Dec 30 (Reuters) - Shanghai and Hong Kong stocks edged higher on Thursday led by Chinese banks, while property shares slid ahead of year-end.
China's stock market ended up 0.29 percent in thin trading, buoyed by late afternoon rebounds in banking stocks as some investors took advantage of their battered valuations, but property developers and car makers continued to sink on policy concerns.
The Shanghai Composite Index ended at 2,759.58 points, reversing an earlier loss as fears over monetary tightening eased during the last few days of trading in 2010.
"The market has calmed as many traders chose to stay on the sidelines toward the year-end," said Cao Xuefeng, analyst at Huaxi Securities Co. "Willingness both to buy and sell has waned," he said.
After a nearly 4 percent drop during the first two days of the week triggered by Beijing's weekend interest rate rise, the market has entered a see-sawing pattern as stock valuations driven down by panic selling attracted bargain-hunting.
Investors are divided over whether the authorities' efforts to rein in liquidity would be countered by an expected faster rise in the yuan next year, which, along with higher interest rates, could invite more money inflows.
Banks, which had been the main drag on the market this week because of the sector's vulnerability to policy tightening, rebounded sharply in afternoon trading, with China's biggest lender Industrial and Commercial Bank of China Ltd jumping 3.2 percent.
Some investors take the view that Chinese banks, which already trade at historically low valuations, will benefit next year from further interest rate increases that would potentially improve lending profitability.
But developers continued their slide after the China Securities Journal published a commentary saying that government real estate curbs would eventually cap property price rises.
Investors are also worried that Beijing could start levying property taxes as soon as early next year, sending China Vanke Co Ltd, China's top listed developer, down 1.8 percent.
Investors dumped auto makers after Tuesday's confirmation that China would end tax incentives for small cars next year, potentially hurting the sector's sales.
SAIC Motor Corp Ltd, China's top automaker, dropped 2.4 percent, while smaller rival Tianjin FAW Xiali Automobile Co Ltd lost 1.8 percent.
However, Hong Kong-listed auto counters extended gains from the previous session. Brilliance China Automotive Holdings Ltd, which rose 4.8 percent on Wednesday, surged 7.2 percent. Guangzhou Automobile Group Co Ltd rose 2.8 percent and Dongfeng Motor Group Co Ltd gained 1.4 percent.
Most wineries and brewers rose on optimism the coming holiday season would boost sales of alcohol. Yantai Changyu Pioneer Wine Co Ltd rose 1.4 percent.
HONG KONG EDGES UP, CHINA RARE EARTH AT 6-WEEK HIGH
In Hong Kong, the benchmark Hang Seng Index edged up 0.13 percent for a second consecutive session of gain to end at 22,999.34, its highest close in more than a week.
Industrial and Commercial Bank of China Ltd climbed 1.2 percent, and China Construction Bank Corp gained 0.7 percent.
PetroChina Co Ltd gained 0.7 percent as oil prices rose further on Thursday.
"The market was seen capped at about 23,100 as investors squared their positions ahead of year-end while the downside was also seen limited," said Conita Hung, head of equity research of Delta Asia Financial Group.
Hung said Chinese banks, technology- and environment-related stocks were seen in favour as investors repositioned their portfolios at the beginning of the year.
Property developer Cheung Kong (Holdings) Ltd and Sun Hung Kai Properties Ltd slid slightly.
The China Enterprises Index of top locally listed mainland Chinese companies gained 0.63 percent to 12,586.84.
China Pacific Insurance (Group) Co Ltd, the most heavily traded stock, rose 2.4 percent to its highest close in more than six weeks. U.S. private equity fund Carlyle Group has sold about $860 million worth of shares in China Pacific.
China Rare Earth Holdings Ltd surged 6.9 percent to its highest in more than six weeks, before ending at HK$3.76, up 4.4 percent. The stock jumped 16 percent on Wednesday after China cut export quotas (Editing by Chris Lewis)