Investors monitor the movement of stock prices at a brokerage firm in Wuhan, Central China's Hubei Province June 25, 2007. [newsphoto]

Chinese stocks posted slight gains on Tuesday after a late rally driven by blue chips, reversing two straight days of sharp losses.

The benchmark Shanghai Composite Index gained 0.82 percent to close at 3,973.37 after moving between 3,863.25 and 3,976.19 points. It lost 3.29 percent on Friday and 3.68 percent on Monday.

The index was in negative territory for most of the day, as investors remained jittery about further government measures to cool down the economy and curb inflation. There were also worries about interest rate hikes and the abolition of tax on interest accrued from deposits.

However, in the last 30 minutes of the trading session, the index started to recover the lost ground, buoyed by blue chip stocks.

Sinopec, Asia's largest oil refiner, rose 1.04 percent to end at 13.61 yuan per share, as opposed to a 5.74 percent drop in the previous session due to the uncertainty about the refiner after its chairman Chen Tonghai resigned abruptly for "personal reasons."

Air China, the country's biggest international airliner, soared 5.68 percent to 10.24 yuan after announcing the sale of its 416 million yuan stake in West China Securities in its latest drive to dispose of non-core assets.

Bank shares were also strong, with the Industrial Bank being the biggest gainer, rising 3.87 percent to 34.32 yuan. The Industrial and Commercial Bank of China gained 0.6 percent to 4.99 yuan, while the Bank of China went up 0.4 percent to 5.03 yuan.

Analysts expect the market to fluctuate for the next days or even weeks in the face of a series of unfavorable factors.

Central bank governor Zhou Xiaochuan said during the week another interest rate hike could not be ruled out because inflation might rise "a little bit" further.

Furthermore, several red-chip companies - mainland firms, which are registered and listed overseas - might sell stocks in the Shanghai or Shenzhen stock exchanges within the next two months. That was widely seen as an attempt by authorities to cool the market through a greater supply of shares.

This week, China's parliament is expected to consider a plan for the Ministry of Finance to issue as much as US$200 billion of yuan bonds domestically to fund purchases of foreign reserves for a new overseas investment agency.

What also affects the market is word that the parliament might authorize the State Council on Friday to reduce or cancel the tax on interest accrued from deposits in an attempt to slow down the diversion of bank savings to the stock market.