* Nikkei down 1.7 pct, fell as much as 2.3 pct at one stage
* Hit by profit-taking after surprise China rate hike
* Finds support as yen uptrend slows, Shanghai turns positive
* China move was surprise but positive in long-run -analysts
By Aiko Hayashi and Chikafumi Hodo
TOKYO, Oct 20 (Reuters) - Japan's Nikkei average fell almost 2 percent on Wednesday and was poised to book its lowest close in three weeks as investors rushed to take profits after China unexpectedly tightened credit.
China raised interest rates by 25 basis points, its first hike in nearly three years, and resource-related shares in particular took a hit as investors reined in risk appetite for commodities.
But the Nikkei pared earlier losses as Shanghai shares reversed an early fall and turned positive, with some analysts also saying China's move was beneficial for the Chinese economy in the long-run.
Fears that the yen could rise if Chinese shares fell were not realised and an apparent halt to the yen's recent appreciation also lent some support to Tokyo shares, market players said.
"China's tightening came as a shock, but the country's intention doesn't seem to be a cooling of its economy, Instead it has moved to prevent bubbles from bursting. It's rather natural, if you look at it in the longer term," said Tomomi Yamashita, senior fund manager at Shinkin Asset Management.
"Financial markets are still supported by expectations of further easing by the United States, with ample liquidity helping assets such as bonds and commodities. The focus from now on is whether these money flows will change course."
By the midafternoon, the benchmark Nikkei was down 165.23 points, or 1.7 percent, at 9,374.22. If it ends the day at this level, it would be its lowest finish since Sept. 30.
The broader Topix declined 1.3 percent to 822.67.
The Shanghai Composite Index was trading 0.7 percent higher.
Resource-related stocks such as trading house Mitsui & Co also tumbled as China's move hit prices of oil, gold and base metals.
Mitsui fell 2.7 percent to 1,293 yen and fellow trading house Mitsubishi Corp dropped 2.6 percent to 1,997 yen.
"Some speculative funds are believed to be temporarily pulling out their money from risk assets after China's tightening. This could be a factor putting pressure on shares and commodities," said Nagayuki Yamagishi, a strategist at Mitsubishi UFJ Morgan Stanley Securities.
Japanese banking shares slipped after U.S. bank stocks were hit on fears that Bank of America and possibly others may be forced to take back billions of dollars in mortgages that should not have been bundled into bonds.
On Tuesday, the Dow Jones industrial average lost 1.5 percent and the Nasdaq Composite Index fell 1.8 percent. (Editing by Edwina Gibbs)