* Nikkei down 1.9 percent, hurt by sell-off in Chinese stocks
* But Nov 8 pct rise is its best monthly gain since March
* Worries about more monetary tightening by China-strategist
* Profit-taking, worries over euro zone encourage selling
* Yen's two-month low vs dollar lends support
By Antoni Slodkowski and Aiko Hayashi
TOKYO, Nov 30 (Reuters) - The Nikkei average slid almost 2 percent on Tuesday, as a tumble in Chinese shares on liquidity worries pushed Japan investors to book profits on a sharp rally for Tokyo stocks this month.
Shanghai stocks fell as a cash shortfall in the domestic money market, after a slew of official tightening steps, led to a liquidity squeeze in the stock market and prompted retail investors, already jumpy about more tightening, to sell shares.
"Investors are worrying that China could raise interest rates after announcing its purchasing managers' index tomorrow," said Hideyuki Ishiguro, a strategist for Okasan Securities.
After posting a surprisingly strong PMI in October, China twice increased banks' required reserves, so a robust reading for November might make the authorities more confident about taking further tightening steps, analysts said.
The Nikkei dropped 1.9 percent or 188.95 points to 9,937.04, after hitting a five-month closing high of 10,125.99 on Monday. Immediate support lies at its closely watched 200-day moving average, now at 9,911.41.
The broader Topix index shed 1.6 percent to 860.94.
"Japanese exporters with strong Chinese ties have already been overbought, so investors simply took the chance to sell them today, but in the long run the impact is likely to be limited."
Japan's largest construction machinery maker, Komatsu Ltd shed 2.4 percent and Hitachi Construction Machinery fell 3.1 percent.
Worries that Europe's credit crisis will spread to Portugal and Spain despite a bailout of Ireland also weighed. But market players said Tokyo stocks were likely to retain this month's positive tone, helped by recent weakness in the yen, which hit a two-month low against the dollar on Monday.
The Nikkei rallied 8 percent this month, its best monthly performance since March, with foreigners shifting funds back to lagging Tokyo equities after U.S. monetary easing lifted expectations of more liquidity in financial markets.
"Short-covering by hedge funds appears to be continuing, though it has lost momentum," said Kenichi Hirano, operating officer at Tachibana Securities.
"Still, moves like this by overseas hedge funds will likely continue into the new year as they try to bring Japanese stocks back to neutral in their portfolio after having overly shorted them up to now."
Strong U.S employment figures and robust and strong sales during the Christmas shopping season would likely spur more buying of Japanese equities, market players said.
Analysts also said that investors were also coming round to the view that Japanese automakers and other exporters were quite resilient to a strong yen and this was also prompting new money to flow into the Tokyo market.
Shares of Cresco surged 7.7 percent to 448 yen after the maker of business-use software announced it will buy back up to 3.8 percent of its shares between Nov. 30 and May 31.
Trade picked up slightly on the Tokyo exchange's first section, with 2.18 billion shares changing hands, its highest volume in more than a week.
Declining stocks outnumbered advancing ones by about 6 to 1. (Editing by Edwina Gibbs)