* CSI300 -1.2 pct; SSEC -1.2 pct; HSI -1.0 pct
* China May inflation data weak
* Hong Kong service sector stocks slump amid fears over MERS
By Samuel Shen and Pete Sweeney
SHANGHAI, June 9 (Reuters) - China stocks slipped into negative terrain on Tuesday, easing off new seven-year highs hit the previous day, as some investors took profit after soft inflation data suggested the economy was still struggling.
The CSI300 index and the Shanghai Composite Index were both down 1.2 percent by midday, reversing the morning's gains. Hong Kong's benchmark Hang Seng index dropped 1.0 percent.
China's consumer inflation eased in May, while producer prices fell for the 38th straight month, raising concerns about growing deflationary pressures as the economy cools.
Although recent weak economic data strengthened the view for more monetary easing, analysts said such expectations had already been fully priced into stock prices.
"There's already ample liquidity in the stock market," said Chen Zhizhong, strategist at China Merchant Securities.
"And monetary easing is no longer a factor in our discussions," he said, adding that investors were more concerned now about a fresh regulatory crackdown on excessive valuations and leverage.
Late on Monday, major brokerage Guotai Junan Securities Co suspended margin financing involving 21 stocks, local media reported, the latest in a string of margin tightening moves by brokerages.
But some investors remained optimistic.
"Looking ahead, the market could experience higher volatility due to regulatory tightening and its psychological impact, but we remain upbeat over the long-term trend of the market," said Wei Fengchun, strategist of Bosera Asset Management Co.
She said that the market was buffeted by monetary easing and deepening reforms in the state sector, advising investors to buy defence, computer, media and telecommunication stocks.
The CSI300 index was at 5,289.37 points by midday, while the SSEC index ended the morning at 5,068.57 points.
The CSI300 banking index retreated after the recent rally, but shares of Bank of China and Bank of Communications remained firm on expectations of imminent reforms to the lenders' shareholding structure.
Most industries fell, with the only bright spot being the IT sector, which was up 0.4 percent, as investors believed the recent sell-off was excessive.
Bright Dairy & Food Co Ltd surged by the 10 percent daily limit, after its shares resumed trading following a three-month suspension.
The Chinese milk producer said it planned to raise up to 9 billion yuan ($1.45 billion) from select investors to buy Israeli food firm Tnuva from its state-owned parent.
The Hang Seng index stood at 27,038.27 points by midday, while the Hong Kong China Enterprises Index lost 1.9 percent, to 13,845.72.
Stocks in Hong Kong's service sector slumped amid deepening concerns over the Middle East Respiratory Syndrome (MERS) (Editing by Jacqueline Wong)