* Shanghai drops 3.05 pct; Hong Kong down 1.11 pct
* Banks, brokerages sink in China in heavy turnover
* Commodities plays fall on stronger U.S. dollar
* Li & Fung continues to shine on upbeat U.S. spending (Updates to midday)
By Jun Ebias and Farah Master
HONG KONG/SHANGHAI, Nov 30 (Reuters) - Shares in Shanghai had slumped 3.05 percent by midday on Tuesday, hitting Hong Kong stocks as mainland banks and brokerages rushed to raise cash after a slew of tightening measures this month left them short of funds.
Reflecting the dash for cash, China's benchmark short-term money market rate jumped early on Tuesday to its highest in more than two years.
Hong Kong was not hit as hard, although oil and energy counters were sharply lower, underperforming the broader market.
The Shanghai Composite Index sank to 2,778.87, a level not seen since early September. The index has fallen 7 percent this month after rising 12 percent in October.
Analysts said the drying up of cash was prompting retail investors, already on edge over whether the central bank would introduce more tightening measures, to sell heavily weighted financials and commodities issues.
"Everyone is anxious about the next rise in reserve ratios or a rise in interest rates. There is little appetite to buy into large-cap stocks," said Li Wenhui, analyst at Huatai Securities in Nanjing.
Financials were the biggest losers, with Industrial and Commercial Bank of China Ltd, the world's most valuable lender, down 2.6 percent and China Merchants Bank Co Ltd 2.2 percent lower.
Top broker Citic Securities Co Ltd fell 4.2 percent.
Volume picked up in heavy selling, with top refiner China Petroleum & Chemical Corp (Sinopec), the biggest drag on the index, down 1.6 percent.
A senior Sinopec official said China's oil demand would grow 5-6 percent over the next five years, slowing from the rapid demand seen in the last two years.
Turnover of Shanghai A shares rose to 99 billion yuan ($14.89 billion) from 72 billion yuan at midday on Monday.
HONG KONG SHARES TRACK CHINA LOWER
The benchmark Hang Seng Index slid 1.11 percent to 22,907.98, putting the market on course for its first monthly loss in three months.
After a rally early this month, investors have been shedding holdings of Hong Kong shares, fretting about China's bid to curb inflation, debt problems in Europe and, more recently, political tensions on the Korean peninsula.
"Investors are dumping shares because they are afraid of rate increases down the road," said Alfred Chan, chief dealer at Pearl Investment. "Banks are not going to be lending money as liberally as they wish because the government has capped lending for next year. Corporate earnings will be restricted."
Sinopec fell 2.7 percent and coal producer China Shenhua Energy Co Ltd dropped 2.1 percent.
Bucking the trend, Li & Fung Ltd, which supplies goods to U.S. retailers such as Wal-Mart Stores Inc, rose 2 percent after touching a record high earlier in the morning.
The stock has risen in recent sessions as investors bet U.S. consumer spending was picking up, as evidenced by brisk Thanksgiving holiday sales. Deutsche Bank AG raised its target price on the stock to HK$53.10 from HK$47.05 with a "buy" recommendation.
Johnson Electric Holdings Ltd soared 14.5 percent. The micro motors maker said it had posted a 27 percent rise in sales for the six months ended September, while net profit rose to $93 million from $14.6 million a year earlier. (Editing by Chris Lewis)