SHANGHAI, April 20 (Reuters) - China stocks rose to fresh seven-year highs on Monday as the central bank ramped up efforts to bolster the slowing economy, cutting banks' reserve requirements by the biggest amount since the depths of the global financial crisis.
But gains were limited by fears of further crackdowns on margin financing and other measures which investors feared could take the steam out of the Chinese market's world-beating rally.
Securities regulators announced on Friday they would allow fund managers to lend shares for short-selling, and ban margin financing through unregulated accounts.
The two policies triggered a heated tug-of-war between bulls and bears, which resulted in highly volatile trade on Monday.
The CSI300 index fell at the open but ended the morning session up 1.2 percent at 4,652.61 points, while the Shanghai Composite Index gained 1.0 percent, to 4,331.28 points.
"The government is sending a clear signal: the stock index is too high," Zhang Yunyi, general manager of Shanghai-based hedge fund manager Hongyi Investment said.
He expects the market to consolidate for about two months, after climbing seven weeks straight and rallying over 80 percent since late November.
But others drew optimism from the central bank's move on Sunday to cut the amount of cash that banks must hold as reserves, adding more liquidity to the world's second-biggest economy to help spur bank lending and combat slowing growth.
The move had been expected after a raft of weak first-quarter data last week, but the size of the cut -- 100 basis points -- was more aggressive than anticipated and the deepest single reduction since the depth of the global crisis in 2008, showing how the central bank is stepping up efforts to ward off a sharp slowdown in the economy.
Analysts forecast the move will release one trillion yuan of liquidity into the economy, and many expect much of that to flow into shares given their far superior returns to other asset classes at present.
"We should all know now by heart that the government is unequivocally supportive of a bull market, and is underwriting the rally," wrote Hong Hao, chief strategist with BOCOM International.
"The bull market is unlikely to end abruptly amid monetary easing, and will spillover to Hong Kong."
His view was echoed by Mark Williams, China Economist at Capital Economics.
"As long as policymakers are still easing, it is hard to see the rally petering out any time soon," he wrote in a note to clients.
For many investors and analysts, the weekend full of cliff-hanging suspense has left them bewildered.
"Regulators gave the market both sticks and carrots, emboldening both bulls and bears," Qilu Securities wrote in a note to clients.
"The policies add to uncertainty in the capital markets."
Bulls got the upper-hand by midday, helped by gains in blue-chips.
Real estate, infrastructure and transport-related stocks rose sharply, as investors bet the RRR cut would help channel more bank lending to these industries.
But Shenzhen's SME board for small- and medium-sized enterprises fell, while the Nasdaq-style start-up board ChiNext rose slightly, as expensive small-caps are increasingly out of investors' favor.
"The interest is shifting to blue-chips," said Li Feng, a trader at Fortune Securities Co.
"Small-caps are too expensive... and more short-selling activities will curb their excessive valuations."
Hong Kong markets sold on the news, however, with the Hang Seng index dropping 0.3 percent, to 27,571.60 points.
The Hong Kong China Enterprises Index was unchanged at 14,541.57. Both surged last week as mainland Chinese investors hunted for bargains in the city's markets, which have lagged the rally in Shanghai.
Editing by Kim Coghill