* Oil, gold, iron ore, copper prices weigh resources
* Santos says rejected $5.1 bln takeover approach
* Stocks down in 2015 overall (Adds analysis, quotes, stocks on the move)
SYDNEY/WELLINGTON, Oct 22 (Reuters) - Australian shares narrowed early losses on Thursday as a rally in oil producer Santos STO.AX , sparked by a $5.1 billion takeover approach, injected buying interest in resources beaten down by lower commodity prices.
Overnight the prices of oil, gold, copper and key Australian export iron ore fell amid concerns about inventory build-up and soft demand growth.
However Santos revealed before the start of trading that it had received, and rejected, an informal offer from Scepter, a fund backed by the ruling families of Brunei and the United Arab Emirates, sending its shares up to 20 percent higher.
After falling as much as 0.6 percent in early trading, the S&P/ASX 200 index .AXJO recovered to be down 0.2 percent or 11.6 points at 5,236.7 by 0120 GMT. The benchmark is down mor3 than 3 percent so far in 2015.
"It's a fairly mundane market but the bid for Santos is clearly the highlight," said James McGlew, executive director of corporate stockbroking at Argonaut.
"It's a good sign for the Australian resources sector on a whole, that they have got people dipping their toe in."
Other energy stocks rose. Energy producer-retailer Origin Energy ORG.AX added 4 percent, Woodside Petroleum WPL.AX gained 0.4 percent and Oil Search gained 1 percent.
In the broader resources sector, BHP Billiton (L:BLT) BHP.AX dipped 1 percent and rival Rio Tinto (L:RIO) RIO.AX declined 0.5 percent, while gold producer Newcrest droped 4 percent. BHP spin-off South32 S32.AX rose 2 percent after saying September alumina production rose 8 percent.
In the major banks, Australia and New Zealand Banking Group ANZ.AX eased 0.5 percent while National Australia Bank NAB.AX and Commonwealth Bank of Australia CBA.AX both fell about 0.2 percent.
Health insurer Medibank MPL.AX fell nearly 3 percent as brokers downgraded their recommendations, citing weaker revenue guidance than previously expected.
New Zealand stocks were modestly higher and on track to post their 10th session of gains although the market appeared to lose some momentum as it approached its 2015 peak.
The benchmark S&P/NZX 50 index .NZ50 edged up 0.1 percent, or 7.8 points, to 5,926.05, having climbed as far as 5,931.38, a high last seen in early August.
It is closing in on its 2015 high of 5,963.05 set on Aug. 3, having gained 6.0 percent so far this month, a blistering pace for the start of the fourth quarter.
Helping underpin the rally, Westpac Banking Corp WBC.NZ climbed 2.7 percent, glass product maker Metro Performance Glass MPG.NZ gained 2.7 percent while financial services provider Heartland New Zealand HNZ.NZ put on 1.6 percent.
For more individual stocks activity click on STXBZ