Nikkei down 1.7 pct as exporters, banks drag

(Updates to midmorning)

TOKYO, May 26 (Reuters) - Japan's Nikkei average fell 1.7 percent on Monday, led lower by exporters such as Canon Inc (7751.T) on a firmer yen and after U.S. stocks booked their worst week in three months on record oil prices, which stoked fears about inflation and weaker consumer spending.

Banks, including top lender Mitsubishi UFJ Financial Group (8306.T), also slid amid concerns about additional losses at their U.S. peers due to falling commercial property prices, on top of the subprime problems, said Takahiko Murai, general manager of equities at Nozomi Securities.

"I expect to see some adjustments in the market, as market sentiment has turned negative on the U.S. economic outlook," Murai said.

"A rebound in stock prices may have reached its limit due to inflation worries and uncertainty about the real economy," he said.

As of 0040 GMT, the benchmark Nikkei average .N225 shed 235.44 points to 13,776.76. It closed up 0.2 percent on Friday but fell 1.5 percent for the week.

The broader Topix index declined 1.4 percent or 19.43 points to 1,357.26.

The Dow Jones industrial average .DJI fell 1.16 percent to close at 12,479.63 on Friday. For the three major U.S. indexes, last week was their worst weekly percentage drop in three months.

Since the start of the year oil prices have climbed more than 30 percent, sapping consumer spending on everything from driving to shopping.

The dollar slid 0.2 percent against the Japanese currency to 103.15 yen JPY=. Investors fret over a stronger yen as it curbs exporters' overseas profits when they are brought back home.

Shares of Canon gave up 2.4 percent to 5,310 yen and Toyota Motor Corp (7203.T) fell 2 percent to 5,040 yen.

Mitsubishi UFJ declined 2.3 percent to 989 yen and No.2 bank Mizuho Financial Group (8411.T) shed 1.7 percent to 516,000 yen. (Reporting by Aiko Hayashi; Editing by Chris Gallagher)