RPT-GLOBAL MARKETS-Asia stocks fall as financial sector weakens

* Financial sector fears add to Asia market woes

* Japan megabanks have $44 bln in Fannie/Freddie debt-report

* Risk aversion is on the rise (Repeats to more subscribers)

By Kevin Plumberg

HONG KONG, July 15 (Reuters) - Asian stocks fell on Tuesday, as investor confidence waned in the region's financial sector, which faces high inflation, a stricter lending environment and massive volatility from overseas markets.

The dollar steadied near a record low against the euro after rising briefly on Monday on the U.S. announcement of an emergency plan to support two struggling top mortgage lenders, but worries about economic growth and the financial system capped its rise.

Megabanks in Japan, Asia's richest economy, had roughly 4.7 trillion yen ($44.3 billion) in debt issued by U.S. mortgage lenders Fannie Mae and Freddie Mac, whose stock plummeted last week on fears about solvency, an article said on Tuesday, adding to worsening sentiment on equities. [ID:nT156412]

Investors' willingness to take risks was further drained by a shift in focus from lending institutions that are believed to be too big to be allowed to fail, to ones that are small enough to collapse. Overnight the S&P U.S. financial sector index .GSPF fell to the lowest in nearly a decade.

Add to all that oil prices, which have remained above $140 a barrel CLc1 for six of the last eight days, and investors have increasingly abandoned stocks for the relative safety of assets like Japanese government bonds, whose benchmark 10-year yield hit a 2-month low.

"With inflation rising, you would expect central banks to raise rates, which will flatten out the yield curve -- and that means banks will not be so profitable here," said Mixo Das, equity strategist with Lehman Brothers in Hong Kong.

"Lending standards are tightening so banks are expected to lose money," he said.

Japan's Nikkei share average .N225 fell 1.4 percent to the lowest since April 1.

The country's biggest bank, Mitsubishi UFJ Financial Group (8306.T), slid 4.1 percent and No. 2 Mizuho Financial Group (8411.T) declined 3.5 percent after the Nikkei business daily said those banks had some of the biggest exposure in Japan to debt issued by Fannie Mae (FNM.N) and Freddie Mac (FRE.N).

Shares traded in the Asia-Pacific region, excluding Japan, dropped 1.2 percent, bringing the year-to-date losses to 22.7 percent, according to an MSCI index .MIAPJ0000PUS.

Australia's benchmark index .AXJO tumbled 1.4 percent to a two-year low, weighed by shares of the country's top banks like Macquarie Group Ltd (MQG.AX), down 5.5 percent, and Commonwealth Bank of Australia (CBA.AX), down 3.4 percent.

Hong Kong's Hang Seng .HSI sank 2.3 percent, with HSBC (HSBA.L)(0005.HK), Europe's largest lender, the top weight on the index for the second consecutive day.