* Shanghai up 0.3 percent, Hong Kong flat
* Banks ease in Shanghai, firmer in Hong Kong
* China mkt sees signs of liquidity flows ahead of Fed call (Updates to midday)
By Jun Ebias and Farah Master
HONG KONG/SHANGHAI, Nov 2 (Reuters) - China's key stock index had edged up 0.3 percent in narrow trade by midday on Tuesday, but the gain was capped by investors paring positions in heavyweight banks and brokerages.
Ahead of the outcome of the Federal Reserve meeting, liquidity appears to have flooded the Chinese market as the average seven-day government bond repurchase rate, the barometer of short-term liquidity supply, fell a huge 16.66 basis points by midday on Tuesday from Monday's close.
The Shanghai Composite Index was at 3,061.7 points, after jumping 2.5 percent to a six-month high on Monday.
The index has gained 15 percent since the start of October, with volume reaching multi-year highs as investors plied cash from the real estate market into stocks, while a marked weakness in the dollar triggered large gains in commodity and energy stocks, offering profit-making opportunities in hot stocks.
Analysts warned of risks in a non-stop rally without corrections.
"The key factor is the Federal Reserve meeting tonight. The market has leapt, earnings are very good, but it is like a runner, you cannot sprint every day without resting a while," said Zhang Yanbing, analyst at Zheshang Securities in Shanghai.
Financials weighed as investors sold off brokerages and banks to buy mining and coal stocks such as Inner Mongolia Baotou Steel Union Co Ltd, which jumped by its 10 percent limit.
Bank of Communications Co Ltd, which fell 1.5 percent and Shanghai Pudong Development Bank Co Ltd, down 1.7 percent, were main drags on the index.
Bank of China Ltd dropped 0.3 percent, while China Merchants Bank Co Ltd dropped 0.8 percent.
China Construction Bank Corp was flat after the country's No.2 lender cut the size of its rights issue this month to raise up to $9.2 billion.
Analysts said the index had little space for large falls, and despite weakness in financials as investors adjusted trades, it was still likely to move in a narrow range for a short period.
"There is caution surrounding the Fed's decision, while recent gains have been relatively large, creating profit-taking pressure on banking, oil and some coal issues," said Chen Shaodan, analyst at China Development Bank Securities. "If the Fed does loosen, increased liquidity will be a big push factor for the market."
Turnover continued to tick up, extending October's trend of increased volume levels, reaching 155 billion yuan ($23 billion) from 136 billion yuan at midday on Monday.
CHINA BANKS GAIN IN HONG KONG
The Hang Seng Index was 0.07 percent higher at 23,668.74 by the midday trading break, as the market took a breather after posting its biggest one-day percentage gain in more than four months in the previous session.
"We are still upbeat on the outlook for Hong Kong because of earnings prospects," said Louis Wong, research head at Phillip Securities. "The market is just taking a pause as investors are sidelined ahead of the FOMC meeting."
"The U.S. market may break out of its sluggish mode this week, and if there is an upside breakout, Hong Kong will test 24,000 at the end of this week or early next week."
Chinese banks extended gains after most of them such as China Construction Bank Corp posted forecast-beating results. CCB, which aims to raise $9.2 billion through a rights issue this month, rose 1.3 percent.
Bigger rival Industrial and Commercial Bank of China Ltd also gained 1.3 percent.
The fundraising was seen as positive for banks because it would strengthen their capital adequacy ratios, dealers said.
Dongfeng Motor Group Co Ltd rose 1.1 percent. Nissan Motor's China venture has raised its 2012 sales target by 50 percent to 1.5 million vehicles.
China Coal Energy Co Ltd fell 1.6 percent on talk that Beijing was planning to raise taxes on the industry and levy them on sales instead of output, dealers and analysts said. Yanzhou Coal Mining Co Ltd lost 2.1 percent. (Editing by Chris Lewis)