(Repeats to widen distribution)
* SSEC index at 3-year high, CSI300 at 21-month peak
* Brokerages, property biggest gainers
* Banks end slightly firmer after initial fall
* Bond yields fall, yuan edges lower vs dollar
By Saikat Chatterjee and Pete Sweeney
HONG KONG/SHANGHAI, Nov 24 (Reuters) - Chinese stocks rose, with a key index hitting a three-year high, while bond yields fell on Monday, as markets cheered a surprise rate cut that investors hope may signal the start of a fresh cycle of aggressive policies to boost flagging growth.
The People's Bank of China (PBOC) cut one-year benchmark lending rates by 40 basis points to 5.6 percent late on Friday, taking market participants who had predicted more covert policy easing measures such as liquidity injections by surprise.
The first rate cut in more than two years reflects a change of course for the PBOC, which had persisted with modest stimulus measures before finally deciding last week that a bold monetary policy step was required to stabilise the world's second-largest economy.
Growth slowed to 7.3 percent in the third quarter and policymakers feared it was on the verge of dipping below 7 percent - a rate not seen since the global financial crisis.
"Policymakers are taking a very comprehensive look in their toolboxes and this should keep investor demand for yield intact," said Tai Hui, chief markets strategist at JP Morgan Asset Management in Hong Kong.
Gains in property and brokerage stocks led the benchmark indexes in Hong Kong and mainland China higher as investors anticipated a cut in mortgage rates.
An index of mainland property shares jumped more than 6 percent, while a property index in Hong Kong rose 3.6 percent.
Analysts at Macquarie expect mortgage rates to fall 100 basis points below where they were in the September quarter - a quantum that led to a rally in those counters in late 2012.
On the mainland, the CSI300 Index of the largest companies listed in Shanghai and Shenzhen closed up 2.6 percent, its highest close since February 2013. The Shanghai Composite Index ended up 1.9 percent at a three-year high.
Banking shares opened lower on worries that the rate cut would squeeze interest rate margins, but recovered on growing hopes that lower borrowing costs would help ease worries about non-performing loans, analysts said.
There was strong demand for mainland shares from foreign investors, with more than half of the daily quota of mainland stocks available to be bought through the Shanghai-Hong Kong stock connect scheme used up by end of the day.
In Hong Kong, the benchmark Hang Seng index ended 2 percent higher.
Turnover surged, with the CSI300 enjoying its second busiest day of trading ever, while daily turnover in Hong Kong was more of HK$90 billion ($11.60 billion) - well above historical averages.
Market interest rates fell, with the weighted average of benchmark seven-day repurchase rates, considered the most reliable indicator of Chinese money conditions, falling to 3.5044 percent from 3.6553 percent on Friday.
The drop in money market rates reverberated out to the far end of the curve, with 10-year government bond yields plunging to 3.53 percent in opening trades, before recovering to 3.67 percent.
The Chinese currency edged lower against the dollar as the rate cut signalled a likely end to a rally in the yuan, which has risen more than 2 percent against a resurgent greenback since May.
The yuan was set for its biggest daily fall since late-September with analysts predicting the currency may drop further against its Asian counterparts, especially if the central bank follows up with more easing.
"The fact that the Chinese authorities felt compelled to cut lending rates suggests enough concern about the economic outlook that continued Chinese currency outperformance seems much less likely," said Jonathan Cavenagh, a Singapore-based strategist for Westpac.
1 US dollar = 7.7567 Hong Kong dollar Additional reporting by Shanghai and Hong Kong newsrooms; Editing by Kazunori Takada and Alex Richardson