* Hang Seng down 0.7 pct but up 1.8 percent on month
* Shanghai outperforms, up 1.4 percent
* PetroChina, Sinopec outperform as oil prices climb
(Updates to close)
By Vikram S.Subhedar and Chen Yixin
HONG KONG/SHANGHAI, Jan 31 (Reuters) - Hong Kong shares fell on Monday, tracking declines across Asia as unrest in Egypt prompted investors to pull back from riskier assets, although a rally in heavyweight oil counters helped limit losses.
Hong Kong's Hang Seng ended 0.7 percent lower but closed out the month with a 1.8 percent gain, despite steady declines since Jan 19 as investors worried that they may have been too optimistic at the start of the year.
China's main stock index ended up 1.4 percent at a two-week closing high, underpinned by selective buying in some sectors seen supported by government incentives, but slipped 0.7 percent for the month.
A weak market in Shanghai on the back of government policy tightening fears put a dent to the strong start to 2011 for the Hang Seng, which is down 4 percent since its January high as short-selling activity steadily picked up over the last two weeks.
Asian markets were broadly lower on Monday as oil prices spiked higher on concern over instability in the Middle East and North Africa, regions that together produce more than a third of the world's oil, compounding fears of inflation in emerging markets.
"The focus will be on oil prices with the fear of a drawn-out resolution to the protests in Egypt, but other macro data this week may give the market some direction in the short term," said a London-based trader at a large European bank.
In the coming week, investors can expect manufacturing data from major economies including the United States and China, a European Central Bank rate meeting on Thursday and the latest U.S. employment report on Friday.
With Chinese markets closed in the latter half of the week for the Lunar New Year holiday, analysts said investors were not keen on carrying big bets into a long weekend even though the data is expected to show that the global economic recovery is on track.
China's markets will close from Wednesday through Tuesday, Feb 8, while Hong Kong will be closed Thursday and Friday.
Despite broader market weakness, the jump in crude oil prices boosted shares of Hong Kong-listed oil majors. Sinopec rose 2.9 percent while PetroChina Co Ltd gained 3.1 percent, both on heavy volume.
Momentum players, those who make trading decisions primarily on market trends, were seen rotating out of offshore oil and gas producer CNOOC Ltd , said a Hong Kong-based trader, after CNOOC shares slumped 7 percent on Friday after its conservative production forecast for 2011. CNOOC fell 0.7 percent on Monday.
Financial issues were weaker, with heavyweight HSBC Holdings Plc and emerging markets-focused rival Standard Chartered both down 1.6 percent.
SHANGHAI UP
Despite U.S. stocks suffering their biggest one-day loss in nearly six months on Friday, the Shanghai Composite Index rose for the third straight session to finish at 2,790.7, extending last week's 1.4 percent rise.
But the index is still down for the month due to a shortfall of cash in the domestic money market, a raft of anti-inflation measures including a hike in bank reserve ratio, price controls and the introduction of the country's first-ever property taxes.
Water companies and other beneficiaries of heavy government investment have been rising over the past few sessions following media reports of more government spending in some sectors.
Water firms gained on Monday after a report said government investment in water conservation projects would be increased to 4 trillion yuan ($608 billion).
"It (today's rise) is a continual rebound," said Wang Aochao, an senior analyst at UOB Kay Hian in Shanghai.
"The positive news also give investors a good chance to speculate in some selective sectors, such as water shares."
The market was also boosted by expectations that the official purchasing managers' index (PMI), due on Tuesday, would show a steady expansion in January, analyst said.
Economists in a Reuters poll predict the PMI to ease slightly to 53.4, but to hold above the 50 line which separates expansion and contraction of activity in the sector.
"We are waiting for tomorrow's PMI data, which is expected to be good," said Cao Xuefeng, a head of research at Huaxi Securities in Chengdu. "That's also boosting investors' confidence."
Qian Jiang Water Resources Development jumped by its 10 percent daily limit, while Chongqing Three Gorges Water Conservancy and Electric Power also leapt 10 percent.
Gold firms outperformed as gold futures edged up, extending gains seen in the previous session as buying continued on fears of more unrest in Egypt and other parts of the Middle East.
Henan Yuguang Gold & Lead rose 8 percent, while Zhongjin Gold was up 5.1 percent. (Editing by Kim Coghill)
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