(Updates to midday)
* HSI slips 1.2 pct, down 12.5 pct in May
* CSI300 sheds 0.4 pct, up 0.2 pct in May
* Li & Fung hammered on escalating Euro zone tension
* China growth-sensitive sectors extend bleed
By Clement Tan
HONG KONG, May 31 (Reuters) - Hong Kong shares are set to end their worst May performance in 14 years on a grim note on Thursday, as an escalating euro zone crisis coupled with fears about China's economy threaten to wipe out all of the Hang Seng Index's gains for the year.
The Hang Seng Index drifted briefly into the red for the year in early trade before paring losses to close down 1.2 percent at midday. It is up 0.1 percent for the year.
For the month of May, it is down 12.5 percent, its worst monthly showing since last September, when it lost 14 percent, and the worst May since 1998, when it also lost 14 percent.
Mainland Chinese markets were also weaker but outperformed Hong Kong.
The large cap-focused CSI300 Index fell 0.4 percent. It is up 0.2 in May and up 12.2 this year.
The Shanghai Composite Index shed 0.5 percent. It is down 0.9 percent in May though up 7.9 percent this year.
"I expect the A-share outperformance to continue for the rest of the year," said Alan Lam, Julius Baer's Greater China equity analyst. "Markets are not yet in panic mode but sentiment is weak. I am seeing reduced interest in the equity markets from clients."
"A China interest rate cut could persuade investors back into the market, but much will depend on what happens at the Greek election in mid-June," Lam told Reuters.
On Thursday, Li & Fung Ltd, the exporter whose global distribution and trading centres make it a barometer of consumer sentiment, slumped 4.5 percent and was among the biggest percentage losers on the Hang Seng Index.
Chinese banks and energy majors, barometers of growth in the world's second-largest economy, were top drags on benchmark indices in both markets.
CNOOC Ltd slipped 1.8 percent, taking its losses on the month to almost 16 percent. PetroChina Co Ltd lost 1.5 percent in Hong Kong and 1.1 percent in Shanghai.
Chinese railway stocks continued losses after outperforming for most of the last two weeks on a series of policy pledges to support the sector until a Xinhua news report late on Tuesday moderated expectations of a large China stimulus.
China Railway shed 2.3 percent in Hong Kong and 3.8 percent in Shanghai. It is now down 12 percent in Shanghai this week after surging 27 percent last week.
THIRD IPO PULLED FROM HK MARKET
London luxury jeweller Graff Diamonds has pulled its planned $1 billion Hong Kong initial public offering, the fourth major IPO to be called off in Asia this week, as tumbling stock markets threaten to claim yet more casualties in the region.
A slump in Asian equities in the past week has already derailed three major IPOs which were aiming to raise a collective amount of up to $1.37 billion: two in Hong Kong and one in Singapore.
Julius Baer's Lam said the window for fund raising could still reopen later in the year, if markets are buoyed by an expected easing of China's monetary policy.
Several other IPOs, some of them in the same luxury sector as Graff Diamonds, were cancelled last year but managed to relaunch towards the end of last year or earlier this year.
But even so, they have underperformed the broader Hong Kong market. Chow Tai Fook, which made its listing debut in the territory in mid-December, is now down more than 31 percent this year. (Editing by Robert Birsel)
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