* Hang Seng Index down 1.1 pct, tracking Asian markets lower
* Shanghai outperforms, up 1 percent, gold counters rebound
* Egypt fears accelerate emerging market losses
* PetroChina, Sinopec outperform as oil prices climb (Updates to midday)
By Vikram S.Subhedar and Chen Yixin
HONG KONG/SHANGHAI, Jan 31 (Reuters) - Shares in Hong Kong fell on Monday morning as investors dumped risky assets, in particular emerging market equities, with the cautious sentiment of the past two weeks mounting amid social unrest in Egypt.
Hong Kong's Hang Seng index was down 1.1 percent by the midday trading break, extending losses since mid-January that have nearly wiped out the gains it saw at the beginning of the year.
The decline came in thin volume, suggesting that this was a paring of risky positions ahead of the Lunar New Year holiday rather than a selloff. Turnover by midday was less than HK$38 billion.
Asian markets were lower as oil prices rose on fears that unrest in Egypt could spread throughout the Middle East.
Bucking the broader weaker trend, oil majors rose as crude oil prices climbed, China Petroleum & Chemical Corp (Sinopec) rose 3.1 percent and PetroChina Co Ltd gained 1 percent.
A trader at a large European bank in Hong Kong said momentum players, those that base trades on market trends, were chasing a rotation out of CNOOC Ltd and into Sinopec, which rose in heavy volume.
CNOOC fell 2.3 percent extending Friday's 7 percent drop on the back of its conservative production forecast for 2011.
Financial issues were weaker, with heavyweight HSBC Holdings Plc down 2 percent and the biggest drag on the broader market. Rival Standard Chartered Plc fell 2.1 percent.
The Hang Seng Index is up 1.3 percent so far this year after slipping more than 4 percent from a Jan.19 high of 24,434.4, weighed down in part by a weak mainland market.
SHANGHAI UP
Chinese shares rose, underpinned by selective buying seen supported by government incentives.
Some analysts said uncertainty over monetary policies during the Lunar New Year holiday continued to hang over the market. People's Bank of China Governor Zhou Xiaochuan said in comments published on Monday that China may rise bank reserve requirements further to counter rapid capital inflows.
The Shanghai Composite Index has fallen 1 percent so far this month on a shortfall of cash in the domestic money market and investor caution over monetary policy.
By midday, the index was at 2,780.1, extending last week's 1.4 percent rise.
"This rise may reflect investor optimism about the market," said Cao Xuefeng head of research at Huaxi Securities in Chengdu. "The index is likely to rise after the Lunar New Year holiday as it has ignored the impact of the global market."
Investors are normally wary of taking big bets ahead of the week-long holiday, concerned about uncertainties in global markets, but the Shanghai index seems to have so far defied any negative impact from U.S. stocks, which dropped to a near six-month low.
Gold issues outperformed as gold futures edged higher on Monday, extending gains seen in the previous session as buying continued on fears of more unrest in Egypt.
Henan Yuguang Gold & Lead Co Ltd rose 7.9 percent, while Zhongjin Gold Corp Ltd was up 3.5 percent.
Water companies also performed well after a report said investment in water conservation projects would be expanded to 4 trillion yuan ($608 billion).
Qian Jiang Water Resources Development Co Ltd and Chongqing Three Gorges Water Conservancy and Electric Power both jumped by the 10 percent daily limit. (Editing by Chris Lewis)