* China rate cut sparks global rally
* But Australian sentiment holds down gains
* Market is still down in 2015 despite 4-day advance (Adds analysis, quotes, stocks on the move)
SYDNEY, Oct 26 (Reuters) - Australian shares posted modest gains on Monday as caution about the global economy undercut early buying momentum in the wake of the decision by key trading partner China to cut rates.
China, Australia's top export market, sparked a global share rally late on Friday when its central bank cut the benchmark one-year lending rate by 25 basis points.
But compared with share-market gains of about percent in the U.S. on Friday and in Japan early Monday, the S&P/ASX 200 index .AXJO was up just 0.3 percent or 16.7 points at 5,368.3 by 0138 GMT. The benchmark has risen the past four sessions but is still down 0.8 percent for 2015.
"It's a little bit disappointing, especially given Australia's ability to benefit from a move like that," said Bell Direct equities analyst Julia Lee, referring to the China rate cut.
"The fact that we have seen a muted move... is not a very bullish sign."
Banks led the index higher after announcing higher home lending rates to offset tough new capital requirements, a move seen as unpopular with borrowers but beneficial to earnings growth.
Westpac Banking Corp WBC.AX was up 0.8 percent, while National Australia Bank NAB.AX and Commonwealth Bank of Australia CBA.AX were up 0.5 percent. Australia and New Zealand Banking Group ANZ.AX added 0.2 percent.
Miners also gained ground as hopes of more shipments to China overweighed weak commodity prices. BHP Billiton (L:BLT) BHP.AX was up 0.7 percent and Rio Tinto (L:RIO) RIO.AX added 1 percent.
Bluescope Steel BSL.AX , the country's biggest steelmaker, jumped 11 percent, the biggest gainer in the benchmark, after saying a tax break would let it keep its flagship steelworks open and that it was buying out a joint venture partner to take full control of a steel mill in the U.S.
Telecoms giant Telstra TLS.AX eased 0.8 percent, while Wesfarmers, owner of No. 2 supermarket chain Coles, slid 0.2 percent. Coles rival Woolworths WOW.AX gained 0.2 percent.
The New Zealand Stock Exchange was closed for a public holiday.