SHANGHAI, March 3 (Reuters) - Shanghai shares briefly touched a decade high before reversing to trade lower by midday on Tuesday, while Hong Kong stocks extended their decline, as the Middle East war dampened sentiment and fuelled risk aversion across regional markets.
** The U.S.-Israel war against Iran has broadened beyond direct strikes on Iranian territory, with Israel conducting air operations against Hezbollah positions in Lebanon, while Iran launched missiles and drones on U.S. targets across the Middle East.
** The benchmark Shanghai Composite index .SSEC was down 0.07%, while the blue-chip CSI300 Index .CSI300 slipped 0.13%.
** In Hong Kong, the benchmark Hang Seng Index .HSI lost 0.29%, after falling 2.14% a day earlier.
** Defense stocks led market losses as investors engaged in profit-taking after recent gains, with the sector sub-index .CSI399973 plunging 5.57%.
** Energy stocks outperformed broader markets, with the sector sub-index .CSIEN jumping 5.85% by midday, as rising oil prices fuelled by Middle East tensions boosted investor confidence in energy companies' profits.
** Shares of oil giants CNOOC 600968.SS, PetroChina 601857.SS and China Petroleum & Chemical Corp 600028.SS hit their daily upside limits in morning trade.
** Energy stocks listed in Hong Kong .HSCIE rose 1.63%.
** "The Middle East conflict's primary economic impact on China is through oil prices," Citi analysts said in a note.
** "The oil shock could cause headline PPI to turn positive earlier than expected, while Chinese CPI is largely insensitive. Prolonged shipping disruptions would pose a secondary risk to China's six-trillion-dollar trade activities."
** Separately, Beijing and Washington have started talks on restarting reciprocal investment, a move that could be one of the few deliverables during an upcoming China visit by U.S. President Donald Trump, the South China Morning Post reported on Tuesday, citing sources.
** Much of the market attention will be shifted to the annual meeting of China's parliament convenes from March 5, where major economic targets and the year's agenda will be mapped out.
** "As Beijing aimed to markedly raise the consumption ratio in its draft for the 15th Five-Year Plan, we believe Beijing will maintain its policy efforts to bolster consumption," said Ting Lu, chief China economist at Nomura.
** "Specifically, we expect the National People's Congress (NPC) meeting to confirm the actual scale of the fiscal subsidy, reiterate some structural measures, including providing childbirth subsidies and improving the social safety net."
(Reporting by Shanghai Newsroom; Editing by Sherry Jacob-Phillips)
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