Nikkei falls ahead of German ruling, Fed meeting

TOKYO (Reuters) - Japan's Nikkei average fell on Tuesday as cautious investors waited on a German constitutional court's ruling over the legality of the European bailout fund and the U.S. Federal Reserve policy meeting this week.

The Nikkei .N225 dropped 0.8 percent to 8,796.98, holding above the support level of its 75-day moving average at 8,780.16.

Cyclical stocks, which have a relatively high correlation to the health of the economy, came under pressure. Industrial robot maker Fanuc Corp (6954.T) was down 1.5 percent, Honda Motor Co (7267.T) was off 1.2 percent and Toyota Motor Corp (7203.T) lost 2.2 percent.

Germany's constitutional court holds the fate of the euro in its hands when it rules on Wednesday whether the European Stability Mechanism (ESM) can go ahead, after already holding it up for several months.

Investors have had high hopes that the U.S. Fed will announce another round of stimulus, or quantitative easing, after it concludes a two-day meeting on Thursday.

"The possibility of QE3 is getting higher. However, if the QE3 were to (be announced) ... all the good news has been discounted," said Yasuo Sakuma, portfolio manager at Bayview Asset Management.

"If the QE3 were to be introduced, the pressure of a stronger yen will not be necessarily good news for the Japanese stock market," he said.

Sakuma also said he had increased his positions slightly in cyclical stocks such as financials and capital goods, as well as cash holdings.

But Societe Generale said another round of monetary policy easing from developed to emerging economies would push bond yields at the long end of the yield curve to even lower levels, leading investors to seek higher yielding assets.

It said in a note that, among its investment recommendations, British and Japanese equities offer a return of nearly 2 percent above domestic government bond yields.

Yields on benchmark 10-year Japanese government bonds were quoted at 0.800 percent on Tuesday, down 18 basis points since the beginning of 2012.

The Nikkei is up 4 percent so far this year.

The broader Topix .TOPX index lost 1.1 percent to 729.02 in light trade in the morning session, with 40 percent of its full daily average for the past 90 days.

But a senior dealer at a foreign bank said he saw net buying among his clients.

"I am seeing a bit of buying in the motors, a bit of buying in Softbank (9984.T), a bit of Yamada Denki (9831.T)," he said.

Technology stocks extended their losses after Intel Corp (INTC.O) cut its third-quarter revenue estimate more than expected on Friday due to declining demand for its chips.

Shinko Electric Industries (6967.T), Ibiden Co Ltd (4062.T), Tokyo Electron Ltd (8035.T) and Advantest Corp (6857.T) were down between 1.7 and 2.7 percent.

Japan Tobacco Inc (2914.T) rebounded 2.1 percent after slumping 8.4 percent in the previous two sessions on concerns about more regulation in Europe after the French government said it was looking at raising tobacco prices as part of a push against smoking.

(Editing by Paul Tait)