* HK shares fall most in three-weeks to seven-week low
* China shares drop on news of year's largest IPO
* China Eastern, Shanghai Airlines gain on merger news (Updates to close)
By Parvathy Ullatil and Claire Zhang
HONG KONG, July 13 (Reuters) - Hong Kong shares fell the most in three weeks, dropping 2.6 percent to a seven-week low on Monday as worries about likely austerity measures from Beijing, following a strong surge in bank lending in the first half, persisted.
Chinese stocks slipped 1.1 percent, with large caps falling on worries that investors would trim holdings to chase a share listing by China State Construction -- the world's largest share offering so far this year.
China Eastern Airlines and Shanghai Airlines jumped by their 5 percent daily limits in Shanghai after China Eastern said it would acquire its smaller rival in a share swap worth 9 billion yuan ($1.3 billion), which would give the newly capitalised airline more than a 50 percent market share in China's financial hub.
China Eastern's Hong Kong-listed shares rose as much as 14.4 percent in early trade to an 11-month high, but the H shares pared gains to finish 2.9 percent higher at HK$1.79.
"The merger is beneficial in the long term as China Eastern's market share will be greatly enlarged. But in the short term, money matters continue to be an overhang," said Linus Yip, strategist with First Shanghai Securities.
"The initial stock reaction seems to have captured most of the positive news in the announcement, so in the short term investors would do well to sell the stock," he said.
FURTHER LOSSES SEEN IN HONG KONG
The benchmark Hang Seng Index was down 453.63 points at 17,254.63, while turnover languished at HK$52.5 billion.
"Indications from the U.S. suggest the market may have underestimated the extent of the recession and the data that will come out later may be worse than expected," said Peter Lai, director with DBS Vickers.
Lai projected the index to drop below 16,000 points this quarter. The gauge has dropped less than 10 percent from its June peak of 19,161.97 despite a two-week slump.
"There could be other signs this quarter to suggest the revival is not coming along as speedily as people though it was, after all this is a global recession," he said.
The China Enterprises Index, which represents top locally listed mainland Chinese stocks, ended down 2.8 percent at 10,279.25.
New listing Chigo Holdings, rose 10.1 percent in its debut trading session, but trimmed early sharp gains as the sell down in the broad market weighed.
The stock had risen to an early high of HK$3.12, a 37.4 percent increase over its issue price of HK$2.27. The retail portion of the HK$120.7 million issue by air-conditioning products manufacturer was 347 times oversubscribed.
China Unicom, which soared 7.6 percent last week on speculation the country's second-largest mobile services provider was close to a deal with Apple to launch its iPhone in China, tanked on Monday as no details on the rumoured deal were forthcoming. The stock was down 6.1 percent at HK$10.12.
China Aoyuan Property dropped after it said it would raise over HK$600 million through a share sale to its controlling shareholder to fund acquisitions and for working capital. The stock closed down 14.2 percent at HK$1.69, while the placement was priced at HK$1.73.
WORLD'S LARGEST IPO THIS YEAR
The Shanghai Composite Index endeddown 1.1 percent or 33.376 points at 3,080.556, below a 13-month intraday high struck on Friday at 3,140.
Gaining Shanghai A shares outnumbered losers by 566 to 352, while turnover for Shanghai A shares dropped to 172.3 billion yuan ($25.2 billion) from Friday's 177.8 billion yuan.
China State Construction Engineering Corp will begin book-building on Tuesday, the latest in a string of IPOs since the government allowed them to resume earlier in the month.
The China Securities Regulatory Commission (CSRC) on Friday said it would restart its reviews for approving initial public offerings (IPO) next week, having suspended them since last September.
"The chance of market consolidation has increased along with the accelerated pace of IPOs, but the market performed better than expected today after the huge IPO was announced," said Western Securities analyst Cao Xuefeng.
Cao said the index had initial chart support at the 3,000-point psychological level. Just below the 3,000 level, the index also has support around 2,850 -- the upward trendline of the market rally since March.
Large-cap shares eased. Industrial and Commercial Bank of China, the country's top lender, was down 1.5 percent at 5.16 yuan. China Shenhua Energy sank 3.8 percent to 31.79 yuan oil prices hovered near a two-month low.
Two new IPOs doubled on their debuts on Friday, which some analysts said may have prompted China State Construction to push up its IPO.
Despite the raft of new shares hitting the market, the Shanghai Composite has proved resilient. Analysts said this week's economic figures for the first half of 2009, including second-quarter gross domestic product, were expected to be upbeat and could limit index's fall.
A flood of new share supply is expected, but ample liquidity is helping the market absorb the IPOs.
The official China Securities Journal reported that China Asset Management Co raised nearly 25 billion yuan in a newly launched index fund, the largest amount raised so far this year for a new fund.
Following the IPO pricings on Friday, Guilin Sanjin Pharmaceutical fell 8.2 percent to 33.07 yuan after racking up gains of 82 percent on Friday. Zhejiang Wanma Cable dipped 2 percent to 25.42 yuan after soaring 125 percent on Friday. (Editing by Eric Burroughs and Chris Lewis)