Nikkei tumbles, Mideast unrest spurs profit-taking

TOKYO (Reuters) - Japan's Nikkei average tumbled on Tuesday, slipping from 9-1/2-month highs for its first decline in seven days in profit-taking triggered by turmoil in the Middle East that could have a medium-term effect on Japanese stocks.

With the exceptions for some domestic-demand defensive shares, most sectors fell as investors pocketed profits across the board after the Nikkei's longest winning streak in over a year.

"We may be headed for a correction, but it's not going to be a huge fall," said Hiroaki Osakabe, a fund manager at Chibagin Asset Management.

"If the situation in the Middle East gets worse and overheated Wall Street markets move lower, the Nikkei may follow suit and fall toward its 25-day moving average (of 10,548.67)."

But Osakabe said from then on the market would keep rising on hopes for a sustained global recovery and as investors keep shifting funds from inflation-mired emerging markets into developed economies.

Other analysts raised concern that while the impact of Middle East turmoil was limited to profit-taking on Tuesday, there could be other long-term repercussions later.

"If oil prices keep rising, consumer sentiment could be dampened," said Chisato Haganuma, chief strategist at Mitsubishi UFJ Morgan Stanley Securities, adding that a continued rise in crude oil prices would likely lead to higher prices for consumer goods and could trigger inflation worries even in developed countries.

U.S. crude futures extended gains on Tuesday, with the March contract reaching $94.49 per barrel, the highest for any nearby month since October 2008, as concern grew that violence in Libya could lead to wider supply disruptions from the OPEC member.

In Libya, violence has escalated with protests sweeping the capital Tripoli and anti-government forces reportedly taking control of the city of Benghazi. Muammar Gaddafi appeared on state television on Tuesday signaling his defiance and saying he had not fled a revolt against his 41-year rule.

The Nikkei ended down 1.8 percent or 192.83 points at 10,664.70. It fell as low as 10,639.78, the lowest level in almost two weeks.

The broader Topix fell 1.8 percent to 956.70.

Market participants played down any short-term impact on the Nikkei after Moody's Investors Service changed the outlook on Japan's Aa2 sovereign rating to negative from stable. Investors said all eyes were on oil prices and the Middle East, and the Moody's move only highlighted a deep-rooted problem.

HIGH VOLUME

Volume was high with over 2.5 billion shares changing hands on the Tokyo Stock Exchange's first section, marking a 12th straight day of volume in excess of two billion shares.

Market players said any immediate effect on stocks from Moody's move should be limited. But they said it may have an impact in the medium term if political instability persists.

"The downgrade didn't really affect stocks. It triggered some selling in Nikkei futures and pushed bank shares even lower, but oil prices and the situation in the Middle East are much more serious risk factors," said Hideyuki Ishiguro, a supervisor of investment strategy at Okasan Securities.

Separately, Moody's cut the outlook for Japanese mega-banking groups' ratings to negative from stable, mirroring its action on Japanese government bond ratings.

Banking shares, which had advanced in the year to date, outperforming the broader market's rally, extended losses in heavy volume after the downgrade.

Mitsubishi UFJ Financial Group, Japan's biggest bank by assets, fell 3.6 percent to 453 yen and Mizuho Financial Group lost 4.1 percent to 166 yen.

Blue-chip shares, which had led the advance in a recent rally, also succumbed to aggressive profit-taking, with the world's No.1 automaker Toyota Motor Corp falling 2.6 percent to 3,805 yen and electronics maker Hitachi Ltd losing 2.8 percent to 483 yen.

Bucking the weakness were railway, gas and electric power shares, which among gainers on the Nikkei as investors shifted into domestic demand-related stocks on fears of more turmoil in the Middle East.

"It's a typical rebalancing when investors pile into shares without much external exposure while snapping up profits on exporters that have recently outperformed," said Hiroaki Osakabe, a fund manager at Chibagin Asset Management.

Central Japan Railway Co gained 0.6 percent to 730,000 yen, Tokyo Gas was 0.5 percent higher at 371 yen and Kansai Electric Power added 0.5 percent to 2,184 yen.

Declining shares outnumbered advancing ones by 1,429 to 171.

($1=83.16 Yen)

(Editing by Michael Watson)