Nikkei sinks to 26-month low as Mizuho tumbles

(Updates with midmorning)

TOKYO Jan 16 (Reuters) - Japan's Nikkei stock average fell to a fresh 26-month low on Wednesday, with Mizuho Financial Group (8411.T) among those hit hardest after its investment in Merrill Lynch MER.N.

Exporters such as Honda Motor Co Ltd (7267.T) and Sony Corp (6758.T) led a broad sell-off after the dollar fell to a 2-1/2-year low below 106.60 yen JPY= early in the morning.

Investors also dumped shares of major banks, with Mizuho falling nearly 5 percent after Japan's second-biggest bank said it would buy $1.2 billion worth of the $6.6 billion in stock that Merrill is raising. [ID:nT370724]

"Some funds are dumping stocks to liquidate their positions regardless of fundamentals," said Tomokatsu Mori, chief fund manager at Fukoku Capital Management.

"Also, with the yen gaining against the dollar, there came the biggest worry that exporters may finally slow down."

As of 0127 GMT, the Nikkei share average .N225 was down 2.2 percent at 13,661.80 after falling as far as 13,594.32, its lowest since Oct. 31, 2005.

The broader TOPIX index .TOPX was down 2.6 percent at 1,314.99. The TOPIX fell more than 3 percent at one point.

The dollar hit a 2-1/2-year low against the yen JPY=, sinking as low as 106.59 yen as investors cut back riskier carry trades on fears of a U.S. recession.

Automaker Honda fell 4.9 percent to 3,100 yen and Sony shed 4.4 percent to 5,650 yen.

Industrial robot maker Fanuc Ltd (6954.T) plunged 7.6 percent to 8,550 yen, the biggest drag on the Nikkei.

Mizuho fell 5 percent to 478,000 yen. Japan's largest bank Mitsubishi UFJ Financial Group (8306.T) shed 3.2 percent to 967 yen and No. 3 Sumitomo Mitsui Financial Group (8316.T) fell 2.4 percent to 809,000.

Some market participants said Japanese stocks have been oversold and the bottom is near.

"What we are seeing is a selling climax," said Yoshihiro Ito of Okasan Capital Management. "Concerns for U.S. economy came to surface with weak retail sales and other data that has led to a selling spree. I think the market's fall will subside after earnings by the U.S. financials are over."

With decliners overwhelming advancers by a ratio of more than 16 to 1, investors found comfort in defensive stocks such as drugmakers and utilities, which are considered less sensitive to economic cycles.

Takeda Pharmaceutical Co Ltd (4502.T) gained 1.4 percent to 6,590 yen and Kansai Electric Power Co Inc (9503.T) rose 4.9 percent to 2,595 yen. (Reporting by Taiga Uranaka; Editing by Mike Miller)