(Updates protest turnout estimate)
By Grace Li
HONG KONG, Jan 1 (Reuters) - Tens of thousands in Hong Kong protested on Tuesday against the city's leader Leung Chun-ying as pressure mounts against the Beijing-backed politician who has been embroiled in an illegal construction scandal since taking office in July.
Thronging the streets on New Year's Day, crowds of people, some dressed in black with colourful banners and wearing long-nosed Pinocchio masks, chanted "Leung Chun-ying step down" in a rally that snaked several kilometres towards government headquarters.
While Hong Kong is a largely stable financial hub with a strong rule of law, the political heat has risen over Leung's failure to adequately explain seemingly innocuous building work on his home, corroding public trust and raising suspicions he may have covered up the scandal last year as he campaigned for the leadership.
"CY Leung does not have the ability and credibility to handle even his own personal scandals. How can he lead Hong Kong in a proper way with political and economic development?" said protest organiser Jackie Hung.
Leung said last month he had been negligent and apologised for how he handled questions over his illegally built basement. Such work is common to maximise living space in space-starved Hong Kong, but similar minor violations have ensnared several prominent officials over the past year.
By the evening, organisers put the turnout at the protest at around 130,000, though police said 17,000 had showed up.
The demonstration was largely peaceful, though police maintained a heavy presence after two journalists were roughed up by pro-government supporters at a rival rally on Sunday.
In a statement, Leung said the government would "humbly" listen to the public's views. Several thousand of Leung's supporters also staged a pro-government New Year rally.
China's senior leaders including premier Wen Jiabao have warned of Hong Kong's "deep rooted conflicts" in the past, though Beijing has so far publicly endorsed Leung's administration when he made a duty visit in December.
In a stormy half year since taking office, Leung has also had to contend with a raft of policy challenges including an unpopular pro-Beijing education curriculum that was later shelved, high housing prices, and a massive influx of mainland Chinese visitors.
Leung, sometimes dubbed the "wolf" for his perceived abrasive style and close ties to the Communist Party, has a chance to assuage some public discontent in a policy address in mid-January, though populist measures aimed at cooling a red-hot property sector and alleviating poverty have so far had only a limited impact on the public mood.
While Hong Kong is generally considered an open and liberal business haven, its leaders since 1997 - when the former British colony reverted to Chinese rule - have sometimes struggled politically in the face of mass popular demands for democracy and more accountable governance.
A half million strong anti-government rally in 2003 later forced former leader Tung Chee-hwa from office mid-term. (Writing by James Pomfret; Editing by Alison Williams)