* Bets on more yuan falls spill into HKD market
* Some unwinding of HKD carry trades seen (Adds statement from HKMA, details)
HONG KONG, Jan 14 (Reuters) - The Hong Kong dollar posted its worst fall in 12 years against the greenback in late Asian trade on Thursday, as bets on more yuan depreciation spilled over to the local currency market.
Traders reported funds selling the Hong Kong dollar against the greenback with some companies also pulling back from converting their offshore yuan deposits into the local dollar.
The sharp drop in the local dollar - its biggest since late 2003 when a deadly outbreak of Severe Acute Respiratory Syndrome (SARS) swept the former British colony - took market participants by surprise and pulled the currency from the stronger end of its trading band.
"The offshore yuan has been falling again today which has put pressure on the Hong Kong dollar," said Kenix Lai, a senior market analyst at Bank of East Asia in Hong Kong.
"Hong Kong is facing headwinds with the Hang Seng index below 20,000 and sentiment in the retail and property markets remaining weak."
In late afternoon trade, the local dollar suddenly sank to 7.7810 per dollar, its lowest since December 2011 from 7.7605 earlier, a large move for a pegged currency. It closed at 7.7620 per dollar on Wednesday.
During periods of intense pressure on the renminbi in the past, such as in last August when the currency was devalued, the Hong Kong dollar becomes a proxy currency.
Traders said there was also some unwinding of Hong Kong dollar carry trades, using the local dollar to fund Chinese assets, as well as some funds aggressively buying dollars.
The move in the cash market was accompanied by a spurt in trading volumes and a rise in implied volatility - a gauge of expected currency swings - in the derivatives markets.
The Hong Kong dollar is pegged to the U.S. dollar on a fixed exchange rate of HK$7.8 per dollar and allowed to fluctuate in a tiny 7.75 - 7.85 band, according to a 30-year old currency board system.
The Hong Kong Monetary Authority, the city's de-facto central bank, said it was normal to have exchange rate movements within the convertibility zone of 7.75-7.85 per dollar.
"We will, as usual, continue to monitor market developments closely," a spokeswoman said.
(Reporting by Michelle Chen and Saikat Chatterjee; Editing by Jacqueline Wong)