Australia shares flail in choppy trade, HK demonstrations eyed

* ASX 200 edges higher in choppy trade, China PMI hovers at 50.2

* 98 shares higher, 89 shares lower, 12 shares unchanged

* Investors cautious on Hong Kong demonstrations (Adds analysis, quotes, stocks on the move)

By Thuy Ong and Gyles Beckford

SYDNEY/WELLINGTON, Sept 30 (Reuters) - Australian shares added 0.1 percent in choppy trade on Tuesday, hovering at February lows as Wall Street closed lower overnight, while investors remained cautious on the pro-democracy protests in Hong Kong.

Elsewhere, activity in China's factory sector showed signs of steadying with the final HSBC/Markit Manufacturing Purchasing Managers' Index (PMI) hovering at 50.2 in September, but lower than a preliminary reading of 50.5. Iron ore for immediate delivery to China was steady at $78.60 a tonne.

Resource stocks were was slightly weaker on the news, with battered iron ore miner BHP Billiton Ltd dipping 0.2 percent, while Iluka Resources Ltd (Other OTC: ILKAF - news) lost 1.4 percent.

The S&P/ASX 200 index added 4.1 points to 5,268.3 by 0220 GMT. The benchmark lost 0.9 percent on Monday and is set to drop 6.3 percent for September, which would be its biggest slump since May 2012.

Sentiment was also dampened as tens of thousands of pro-democracy protesters blocked Hong Kong streets in the early hours on Tuesday. China last month rejected demands for people to freely choose the city's next leader, wanting to limit elections to a handful of candidates loyal to Beijing.

September's sell-off was sparked by a rout in iron ore prices, a weaker Australian dollar and a rise in bond yields.

"People were concerned that the whole rally in the market has been driven by low interest rates and now bond yields are going up which suggests that global interest rates are going to rise," said Damien Boey, an equity strategist at Credit Suisse (NYSE: CS - news) .

"It depends now on whether those tightening fears actually come across to corporate bond markets and whether credit spreads start to widen."

Among the 'Big Four' banks, Commonwealth Bank of Australia (Other OTC: CBAUF - news) added 0.1 percent, while National Australia Bank edged 0.4 percent higher.

The health care sector also pushed the market from the day's lows with Ramsay Health Care Ltd adding 0.6 percent, while bionic ear maker Cochlear Ltd (Other OTC: CHEOF - news) climbed 1.5 percent.

Aurizon Ltd lost 0.9 percent to 12-month lows of A$4.46 after the rail haulage group warned a smaller-than- xpected government cap on revenue of A$4.02 billion it can generate from its key Queensland state operations could hurt furture investment in the sector.

Recall Holdings Ltd soared 9.4 percent to all-time highs of A$5.49 after Bloomberg reported that Iron Mountain (NYSE: IRM - news) was in takeover talks with the company. Recall has denied the report in a statement to the ASX.

New Zealand stocks were trading with a negative tone, with the benchmark NZX50 index down 0.2 percent to 5,246.83.

The market ends the month marginally firmer, having touched a life time high of 5289.48 last week.

Most leading stocks were a touch firmer, with the stand out performer being software company Xero, which bounced 2.9 percent higher to NZ$21.24 as it recouped Friday's losses.

Biotechnology company Pacific Edge was up 2.2 percent at NZ$0.92, as it attracted further support after gaining official Japanese recognition for one of its diagnostic tests last week.

The NZX also said the Lyttelton Port Company would cease trading on Oct 6 as its major shareholder moves to complete its takeover by the compulsory acquisition of minority shareholders. (Editing by Eric Meijer)