SHANGHAI (Reuters) - China's stock market rose the most in two weeks on Wednesday, reversing from early losses as investors shrugged off MSCI's decision not to add mainland shares to one of its key benchmark indexes.

Traders said investors had already been bracing for a "no" decision, as reflected by Monday's market tumble of more than 3 percent, with some bargain hunting in the process.

The blue-chip CSI300 index rose 1.3 percent, to 3,116.37, while the Shanghai Composite Index gained 1.6 percent, to 2,887.21 points.

They had opened roughly 1 percent lower as some investors who had clung on to hopes of MSCI inclusion unwound their bets.

Index provider MSCI Inc said on Tuesday that Beijing had more work to do in liberalising its capital markets before it could add Chinese A shares to its emerging markets index, which is tracked by $1.5 trillion of managed assets.

With the MSCI decision now in the rear mirror, investors are focusing again on China's struggling economy and the potential fallout for global growth and financial markets if Britain votes to leave the European Union next week. Europe is one of China's biggest export markets.

"Regarding MSCI, most retail investors in China don't really care. And for institutions, their expectations of an inclusion have been greatly reduced since the market crisis last year," said Charles Wang, Chairman of Shenzhen-based Appleridge Capital Management Co.

"Failing to be included this time is not necessarily a bad thing. It can prod the government to improve market mechanisms and push reforms."

China's securities regulator said on Wednesday that MSCI's decision won't affect the reform and opening process of the country's capital markets, adding that any global benchmark index that doesn't include A shares is "incomplete".

"Even if A shares are included, it would still just be a symbolic event. The real impact would be limited," said Shen Weizheng, a fund manager at Shanghai-based Ivy Capital.

"My biggest concern now is China's economy. After strong stimulus previously, the government seems to have suddenly tightened the liquidity tap. I'm afraid the economy will loose steam."

All main sectors in China rose on Wednesday, with small-caps leading the gains.

David Dai, investor director at Nanhai Fund Management Co, said his hedge fund has been bargain hunting at the open on Wednesday and over the past few sessions, taking advantage of market anxiety.

"Many stocks have fallen a lot recently, and worth buying. Now that MSCI doesn't include A shares, we just play by our own rules of the game," Dai said.

(Reporting by Samuel Shen and Elias Glenn; Editing by Jacqueline Wong)