* Saudi index at lowest close since Jan. 21

* Petrochemical stocks hit by oil price disappointment

* Austerity threatens shares favoured by retail investors

* Some telcos, utilities outperform as defensive stocks

* Egypt's Kabo surges after annual earnings

By Andrew Torchia

DUBAI, Sept 28 (Reuters) - Saudi Arabia's stock market fell sharply for a second straight day on Wednesday, leading the entire region down, in response to weak oil prices and government austerity measures.

The Saudi equities index .TASI , which had retreated 3.8 percent on Tuesday, sank a further 3.4 percent to 5,534 points, its lowest finish since Jan. 21. It has tumbled 19.5 percent from a peak in April.

Trading volume climbed to a two-month high as the index fell below technical support on the February low of 5,551 points, though it closed off its intra-day low. It has stronger support at the January low of 5,349 points.

Brent oil futures LCOc1 had fallen about 3 percent to around $46 a barrel on Tuesday after Iran rejected an offer from Saudi Arabia to limit its oil output in exchange for Riyadh cutting supply. urn:newsml:reuters.com:*:nL3N1C4025

This hit petrochemical stocks, with Saudi Basic Industries 2010.SE sliding 4.0 percent on Wednesday. PetroRabigh 2380.SE outperformed the sector, dropping only 2.1 percent, after saying it would proceed eventually with a rights issue that has been delayed since 2015.

The Saudi insurance sector also suffered after the government said this week that it would reduce bonuses and perks for public sector workers; insurance stocks are favoured by local retail investors, who will have less disposable income because of the austerity drive.

"In Saudi Arabia it is very common to see an average public sector employee trading in the stock market, because someone from his family once made a fat profit - but those days are long gone now. They simply won't have the financial flexibility with these austerity moves," said a Jeddah-based broker.

Among other stocks directly exposed to consumer sentiment, travel agent Al Tayyar 1810.SE plunged 8.2 percent.

Some telecommunications firms and utilities, seen as defensive shares, performed relatively well and Zain Saudi 7030.SE was one of only four rising stocks, gaining 3.1 percent.

Elsewhere in the Gulf, Dubai's index .DFMGI fell 0.4 percent in thin trade as Emaar Properties EMAR.DU lost 1.0 percent. Abu Dhabi .ADI dropped 0.5 percent with another real estate firm, Aldar Properties ALDR.AD , falling 1.5 percent.

Qatar .QSI edged down only 0.1 percent, supported by a 1.2 percent gain by Industries Qatar IQCD.QA .

In Egypt, the index .EGX30 dropped 0.5 percent in a broad-based decline. But textile producer Kabo KABO.CA jumped 10 percent in its highest trading volume since January after posting a 14 percent rise in net profit for the year to June 30.



WEDNESDAY'S HIGHLIGHTS



SAUDI ARABIA

* The index .TASI sank 3.4 percent to 5,534 points.

DUBAI

* The index .DFMGI fell 0.4 percent to 3,453 points.



ABU DHABI

* The index .ADI dropped 0.5 percent to 4,449 points.



EGYPT

* The index .EGX30 fell 0.5 percent to 7,908 points.



QATAR

* The index .QSI edged down 0.1 percent to 10,465 points.



KUWAIT

* The index .KWSE fell 0.2 percent to 5,402 points.



OMAN

* The index .MSI slipped 0.4 percent to 5,726 points.



BAHRAIN

* The index .BAX edged up 0.2 percent to 1,142 points. (Editing by Keith Weir) ((andrew.torchia@thomsonreuters.com; +9715 6681 7277; Reuters Messaging: andrew.torchia.thomsonreuters.com@reuters.net))