* Shanghai retreats, catching up with weak global markets
* Hang Seng Index weaker, tests technical support at 20,587
* Hong Kong volume tepid amid investor caution
* Flurry of share placements not encouraging - trader (Updates to midday)
By Vikram S. Subhedar and Lu Jianxin
HONG KONG/SHANGHAI, Aug 25 (Reuters) - China's key stock index was down 1 percent by midday on Wednesday as a fall on Wall Street sparked selling in large caps such as PetroChina and ICBC, which are sensitive to macroeconomic conditions.
Investors are concerned that persistent weakness in overseas markets will lead to a double dip or even deflation in major global economies, from the United States to Japan, that could spill over to China by hitting its exports.
The Shanghai Composite Index ended the morning at 2,623.9, reversing a 0.5 percent rise on Tuesday. The index has see-sawed since last Thursday when it rallied 16 percent from early July.
"Wall Street's fall is the key factor for the Chinese market weakness today," said Cao Xuefeng, head of research at Western Securities in Chengdu. "But investor sentiment remains stable, and the index should be able to find support at 2,600."
Others were not as optimistic.
"The index has tested but failed to breach resistance at 2,680 several times recently," said a trader at a major Chinese brokerage. "Under such market circumstances, if liquidity conditions deteriorate because of excessive share and bond supply, the index could reverse its recent rally."
PetroChina Co Ltd and Industrial and Commercial Bank of China Ltd (ICBC), the two biggest index heavyweights, fell 0.8 percent and 1 percent, respectively.
Weighing on the market, eight initial public offerings are due this week, with analysts estimating they will freeze around 800 billion yuan ($117.7 billion) in subscription funds.
This week will also see a combined 87.5 billion yuan in bonds offered by the Ministry of Finance, local governments and Central Huijin Investment Co, the largest shareholder of the country's state-controlled banks.
HONG KONG SLIPS
Hong Kong shares extended losses on Wednesday, although the fall was milder than in most other Asian markets after Tuesday's late session selloff that traders said had already factored in weak housing data in the United States.
Asian stocks retreated on Wednesday, with Japan's Nikkei Index at a 16-month low, as investors sold riskier assets after a spate of worrying U.S. economic data, while the yen slipped from a 15-year high on a report Tokyo was considering weakening its currency.
The benchmark Hang Seng Index finished the morning down 0.43 percent at 20,570.16, slipping further below key resistance at its 200-day moving average. The index hovered near near-term support at the 20,586 level where a gap opened on the upside on July 23.
The Hang Seng Index is also testing trendline support after pulling back from resistance that has capped the index's rise since November last year.
A breach of this support level opens up the possibility of the index fallng back to its May lows.
Volume remained lacklustre on the Hong Kong stock exchange, suggesting investors are cautious about making big bets.
"Clients are pretty quiet today, but I have to say the mood isn't very bullish," said a Hong Kong-based trader. "We're seeing more and more share placements right after companies are reporting results. It looks as though they're coming in to raise capital while they can and that can't be an encouraging sign."
Selling was broad-based with large-cap stocks leading declines.
Tencent Holdings Ltd, down 3.4 percent, was the top loser on the Hang Seng Index. Aluminum Corp of China Ltd (Chalco) was down 3.2 percent, extending losses to more than 8 percent for the week after reporting a surprise quarterly loss. ($1=6.8 Yuan) (Editing by Chris Lewis)