BEIJING (Reuters) - As China's neighbours succumb to soaring oil markets and cut back expensive fuel subsidies, Beijing is stubbornly refusing to let pump prices rise, driving some service stations to hike prices illegally or simply shut down.

The emergence this week of forecourts selling diesel at well above the government's low official rate follows months of sporadic shortages, evidence of the subtle test of wills between Beijing and state oil companies forced to bear the cost of selling cheap fuel to keep inflation in check.

China has raised its pump prices only once in the past two years - a 10 percent hike in early November - while world crude markets (CLc1) nearly doubled over the period, racing up to a peak over $135 per barrel in late May before retreating.

Facing losses on every litre of fuel they sell, state-owned refiners Sinopec and PetroChina prefer to sell as little as they possibly can, creating some shortages and putting pressure on Beijing to raise prices.

While India, Indonesia, Sri Lanka and Malaysia have all recently increased gasoline and diesel rates in order to ease the cost of subsidies, analysts say China will hold off until after the Olympics, meaning the stand-off may last months.

In the meantime, station owners struggle.

"We can't source gasoline and we can't make a profit from diesel," said a despondent worker at the Baoli Taide station, who had been selling the fuel for 6.8 yuan ($0.980) a litre compared with a maximum official retail price of 5.29 yuan a litre.

The manager of another station said they still get a small flow of fuel, but he did not dare sell to anyone except trusted customers out of fear they will be reported for price gouging.

"This afternoon a tourist coach was begging us to sell them diesel but we just didn't dare," said one pump attendant.

Oil prices have fallen sharply over the past two weeks as traders fear that higher prices across Asia will erode demand, but analysts say the impact will be marginal until China, the world's second-biggest oil consumer, follows suit.

Few see that happening soon.

The government is focused on fighting inflation, which is running near the highest level for over a decade, and fears that allowing fuel prices to float freely would cause a ripple effect across the economy or lead to social unrest.

So leaders have vowed that in the short term there will be no fuel price increases. Thanks to its budgetary surplus, tax revenues rising at a rate of 30 percent and its very small public debt burden, Beijing can afford to buy its way out of trouble.

The government plans to hand out more regular subsidies to refiners to offset their losses - it gave Sinopec 7.1 billion yuan in April - and has promised tax rebates as well.

"Our oil team calculates that Sinopec and PetroChina will gain subsidies of at least 100 billion yuan this year, equivalent to two percent of tax revenue in 2007, and not much less than the 132 billion yuan spent on health in 2006," Macquarie analyst Paul Cavey said in a recent research note.

Besides the mounting cost, the government's stance undermines its own aim of introducing market-based pricing to curb demand growth and promote more efficient use of resources.

But for Beijing those factors are secondary to stability, analysts say, and its resolve to hold the line on prices will really be put to the test if shortages become more widespread.

Its previous increase in November came just days after leaders pledged not to move on prices, once policymakers realised political pressure would not restore supplies.

Before then, however, executives and analysts say Beijing will likely revamp its windfall tax on oil production, allowing energy firms to keep more of their profits from pumping oil to offset refining losses - without a painful price increase.