HK shares at 3-wk low, but index holds above 12,000

* Stocks track global slide, but HSI ends above 12,000

* Decliners beat advancers, 658 to 113

* Telco equipment makers defy with strong gains on 3G hopes

By Parvathy Ullatil

(Updates to close)

HONG KONG, Nov 20 (Reuters) - Hong Kong shares dropped 4 percent on Thursday, as worries over a long-lasting global recession fuelled a flight to cash, but the main index closed above 12,000 points as new lows in blue-chip property stocks prompted short covering late in the session.

"The strong U.S. dollar in tandem with the U.S. dollar/Hong Kong dollar peg, as well as the lack of credit creation and stagnant money supply, will see property and equity prices deflate," said Andrew Orchard, analyst with The Royal Bank of Scotland.

"We believe the Hong Kong government could implement measures to prop up the property market in the event of prolonged asset deflation."

Local property counters, which plunged earlier in the day on warnings from investment banks of further corrections in home prices as banks tighten lending, closed off lows.

Billionaire Li Ka-shing's property flagship, Cheung Kong Holdings (0001.HK), closed up 0.5 percent after sliding 6.3 percent earlier.

Sun Hung Kai Properties (0016.HK), the territory's leading property developer, which fell 8.2 percent during the day to a new five-year low of HK$48.95, closed 5 percent lower.

Unwinding carry trades amid a global equities sell-off pushed the Hong Kong dollar to the upper limit of its pegged trading band against the greenback. The territory's central bank has injected $3.7 billion into the banking system this week in a bid to curb the appreciation in the local currency.

The benchmark Hang Seng Index .HSI finished 517.24 points lower at 12,298.56, a three-week closing low, after dropping to 11,976.88 earlier.

"There is no major macro news coming out of the U.S. overnight so that may lend some stability to the market on Friday, but looking ahead, everybody seems to be in agreement that the S&P 500 will hit a new low which will force other markets to test new lows too," said Andrew Sullivan, sales trader with Mainfirst Securities.

The Hang Seng Index sunk below 11,000 points, a level it is expected to test again in coming weeks, on Oct. 27 for the first time in 4-½ years.

Telecom equipment makers bucked the broad trend, cementing Wednesday's sharp gains on hopes that China will issue 3G licences before the end of the year, flagging off multi-billion investments in network infrastructure.