(Adds details, comments, stocks on the move)
SYDNEY May 23 (Reuters) - Australian shares fell 1.5 percent in late morning trade on Thursday, after Wall Street retreated over worries that the U.S. Federal Reserve may consider winding back its economic stimulus programme, and weak data from China.
Investors were watching for HSBC's flash May manufacturing report on China, Australia's biggest export market, which May fell to 49.6, slipping under the 50-point level demarcating expansion from contraction for the first since October.
A sub-index measuring overall new orders dropped to 49.5, the lowest reading since September, suggesting China's domestic economy is not strong enough to offset soft external demand.
Fed Chairman Ben Bernanke said the Fed could decide to scale back the pace of bond purchases at one of the "next few meetings" if the economic recovery looked set to maintain forward momentum.
The Fed's current $85 billion per month bond purchase programme has been a major force behind a rally in U.S. equities which rose about 16-17 percent this year, and also the 10 percent gain in the Australian stock market.
"Rather than having a big impact on the real economy, it(QE) is actually having more impact on highly liquid assets in the economy like the stock market," said Andrew Quin, research strategy coordinator at Patersons Securities based in Perth.
"That really indicated that there is slightly higher chance that QE will start to be wound back," he said.
The benchmark S&P/ASX 200 index dropped 75.0 points to 5,090.4 by 0147 GMT. The index fell 0.3 percent on Wednesday.
The market had three attempts to break the 5,200 line in the last nine days, but all failed, Patersons' Quin noted.
"So technically the market will look a little bit weak, (and) probably due to come back a bit," he said.
The big four banks all pulled back from recent bull run on the back of strong earnings and high yields. Top lender Commonwealth Bank of Australia declined 1.8 percent, and Australia New Zealand Banking Group fell 3.3 percent.
Despite the sell-off, Michael McCarthy, chief market strategist at CMC markets in Sydney, dismissed some analysts' view that Australian banks had been overvalued.
"While they are trading at a premium compared to other global banks, the strength of their balance sheets and their reasonable profit outlook combined with important investor metrics like dividend yields, means that they're not overvalued," he said.
Top miner BHP Billiton Ltd edged up 0.4 percent, while rival Rio Tinto Ltd slipped 0.8 percent.
Gold miners were weaker after bullion prices slipped on Bernanke's comments. Australia's biggest listed gold miner Newcrest Mining Ltd slid 3.5 percent, while junior name Focus Minerals Ltd slumped 12.5 percent with volume among the highest.
New Zealand's benchmark NZX 50 index slipped 1.8 points to 4,608.4.
STOCKS ON THE MOVE
* QBE Insurance Group Jumped 5.3 percent to A$16.04, after rating agency S&P affirmed its core insurer financial strength rating.
(0138 GMT)
* Sundance Resources Ltd soared 20 percent to A$0.08, after the company said late on Wednesday that it was not aware of any information related to the price change and volume increase. The stock dived 17 percent in the previous session.
(0135 GMT)
* Australian building materials group James Hardie Industries Ltd lost 1.8 percent to A$10.26, after reported an 11 percent fall in fourth-quarter profit.
(0140 GMT)
* Beach Energy Ltd was down 1.0 percent to A$1.25, after the company said it would expand Copper Basin oil exploration acreage in Queensland state and acquire 50 percent of ATP 732 from Bengal Energy.
(0140 GMT)
* Cochlear Ltd dropped 3.7 percent to A$66.46, after Goldman Sachs downgraded the stock from neutral to sell.
(0141 GMT) (Reporting by Maggie Lu Yueyang; Additional reporting by Michael Sin; Editing by Eric Meijer)
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