Nikkei falls 0.6 pct, banks continue to suffer

*Nikkei down, banks fall further on financial sector worries

*Toyota falls to nearly three-year low on target cut report

*Energy shares hit by sharp drop in oil prices (Adds stocks and comments)

By Taiga Uranaka

TOKYO, July 16 (Reuters) - Japan's Nikkei share average fell 0.6 percent on Wednesday, with bank shares extending the previous day's sharp losses amid deepening worries about the financial sector.

Toyota Motor Corp (7203.T) fell to a nearly three-year low on a report that the automaker would cut its global sales target for this year due to a slowdown in U.S. sales. [ID:nT219037]

A stronger yen added to exporters' woes, with video game maker Nintendo Co Ltd (7974.OS) losing more than 4 percent.

Japan's top three banks, which lost more than 5 percent on Tuesday, continued to suffer, with No. 1 lender Mitsubishi UFJ Financial Group (8306.T) falling nearly 2 percent.

"I think Japanese banks are better positioned (than U.S. and European rivals). Their exposure to Fannie Mae and Freddie Mac debt securities should not be a cause of much concern, unlike equities," said Naoki Fujiwara, fund manager at Shinkin Asset Management.

"But investors are waiting to see U.S. bank earnings this week," he said, referring to earnings by Merrill Lynch MER.N and other financial institutions.

Mitsubishi UFJ fell 1.9 percent to 908 yen, but No. 2 Mizuho Financial Group (8411.T) and No. 3 Sumitomo Mitsui Financial Group (8316.T) ended the morning off the day's lows, with Mizuho down 0.4 percent and Sumitomo Mitusi down 0.1 percent.

The benchmark Nikkei .N225 ended the morning down 73.39 points at 12,681.17. The broader Topix lost 0.9 percent to 1,241.93.

The dollar's drop against the yen, though off a six-week low of 104.16 yen hit on Tuesday, hurt exporters.

Nintendo, maker of popular Wii video game console, fell 4 percent to 56,000 yen.

TOYOTA FALLS

Toyota fell 1.3 percent to 4,620 yen, hitting the lowest intraday price since September 2005.