HONG KONG, Nov 6 (Reuters) - Global fund managers sold China equities sharply in October despite further steps from authorities aimed at boosting the world's second-largest economy, according to a report from Morgan Stanley that cited data from fund flow tracker EPFR.

China and Hong Kong equities saw a combined $3.1 billion in net outflow from active long-only funds last month, a third consecutive month of net selling exceeding $3 billion, the report, seen by Reuters, said.

"The outflows (are) mostly due to regional funds' rebalancing out of China, in which European-domiciled funds led," Morgan Stanley analysts led by Gilbert Wong said.

According to Morgan Stanley, persistent outflows have resulted in foreign long-only managers being their most underweight on China since 2018.

The report said European funds have offloaded about half of their holdings accumulated since late 2020 and that there had also been an acceleration in outflows from U.S.-domiciled funds in October.

Investors remain cautious on China's economic recovery, particularly after manufacturing activity unexpectedly contracted in October.

The MSCI China benchmark slumped 4.3% last month, while the CSI 300 dropped 3.2%.

Stocks sold off include JD.com, Xiaomi and China Construction Bank. But bets were added to internet giants such as Alibaba and Baidu, as well as to insurance firm AIA.

Separately, Goldman Sachs prime services data showed hedge fund net allocation to China increased to 8.5% as of end-October, up from 8.1% at end-September. (Reporting by Summer Zhen; Editing by Edwina Gibbs)