* Shanghai rises 1.6 percent, Hong Kong gains 0.9 percent
* China automakers gain on upbeat sales outlook
* Financials rise in active session in Shanghai (Updates to midday)
By Jun Ebias and Farah Master
HONG KONG/SHANGHAI, Dec 2 (Reuters) - Shares in Shanghai and Hong Kong were higher by midday on Thursday, tracking gains in other Asian markets, and as a funding squeeze in China eased.
Optimism that debt problems in Europe would finally be resolved also inspired some bargain-hunting, with investors chasing Chinese financials and automakers.
"The market is reacting to large gains in foreign markets, particularly Wall Street. On the domestic policy front, officials have said they will ensure a stable and healthy stock market," said Cheng Yi, analyst at Xiangcai Securities in Shanghai.
The Shanghai Composite Index rose 1.6 percent to 2,868.49, hovering just below the 250-day moving average at 2,875 points, with large-cap issues such as Industrial and Commercial Bank of China Ltd higher.
The index had retreated far below the closely watched moving average earlier this week because of a funding squeeze. Concern about further measures to tighten official monetary policy triggered a more than 5 percent drop in November, compared with a gain of 12 percent in October.
Retail investors, who make up two-thirds of turnover, had spurned large-cap banking and commodity issues, sectors they consider vulnerable in a policy tightening environment.
However, analysts said recent falls had been excessive and they expected the benchmark index to stabilise around the 250-day moving average ahead of inflation data due on Dec. 13.
Financials were the biggest gainers, dominating Shanghai's most actively traded stocks.
Top brokerage Citic Securities Co Ltd jumped 2.7 percent, and Agricultural Bank of China Ltd gained 1.1 percent. The world's most valuable lender, Industrial and Commercial Bank of China, was 2.1 percent higher.
Volume bounced up from very thin levels on Wednesday as investors bought back into trades they had avoided over the past few weeks. Turnover of Shanghai A shares rose to 74 billion yuan ($11.11 billion) from 55 billion yuan on Wednesday at midday.
Commodities issues were also large gainers, with oil major China Petroleum & Chemical Corp (Sinopec) up 2 percent. China Shenhua Energy Co Ltd, the world's most valuable coal producer gained 1.5 percent.
Cheng of Xiangcai Securities cautioned that larger gains would be muted on concern that inflationary pressures remain a threat. He said the index would likely finish at around 2,900 by year-end, restrained by cautious sentiment.
CASH-RICH INVESTORS BARGAIN HUNT IN HK
"There's a lot of idle cash in Hong Kong looking to buy oversold stocks," said Peter So, strategist at CCB International Securities. "But most investors are still on the sidelines until the uncertainty about China's rate increase is cleared up."
China would likely raise its key rates by 25 basis points this month, So said, its second increase this year as part of measures to lower inflation.
About HK$500 billion ($64.5 billion) worth of assets managed by hedge funds was parked in Hong Kong for investing in local and regional stock markets, the Hong Kong Economic Journal said, citing Ceajer Chan, the territory's Secretary for Financial Services and the Treasury.
The benchmark Hang Seng Index was up 0.9 percent at 23,458.74, after falling to near technically oversold territory in recent sessions as investors fretted about China's tightening policy, Europe's debt problems and tensions on the Korean peninsula.
Macau casino operator Galaxy Entertainment Group Ltd rose 3.1 percent. Macau said gaming revenue rose 42 percent in November from a year earlier, the second-strongest month ever after October.
Car maker Dongfeng Motor Group Co Ltd gained 3.8 percent and Guangzhou Automobile Group Co Ltd Group climbed 5.9 percent after General Motors Co and its Chinese partners reported brisk sales in November, underscoring rising demand from China's growing of middle class.
Coal producer China Shenhua Energy Co Ltd slumped 4.7 percent after media reports that Beijing had ordered a freeze on coal prices in 2011.
Huaneng Power International Inc surged 6.8 percent. The Chinese power producer said it would buy a 50 percent interest in Shanghai Time Shipping for 1.06 billion yuan, and a 30 percent interest in Hainan Nuclear Power Co Ltd for 174 million yuan. The deals will be funded by internal cash.
Reports that coal prices would be kept steady also helped lift sentiment on power producers. (Editing by Chris Lewis)