Nikkei down as financials weigh, stimulus plan awaited

* Nikkei falls 1.5 pct on last day of financial year

* Posts quarterly drop of 8.5 pct, yearly drop of 35.3 pct

* Growing fear for world financials hits banks, insurers

* IHI bucks trend after sharply raising forecast

By Elaine Lies

TOKYO, March 31 (Reuters) - Japan's Nikkei stock average fell 1.5 percent on Tuesday, the final day of the financial year, with banks and insurers down on renewed worry about the health of the global financial system in the wake of European bank rescues.

Mizuho Financial Group (8411.T) lost over 4 percent in volatile trade, with overall volume moderate as investors awaited details of a fresh Japanese stimulus plan due out later in the day and a G20 meeting of rich and major developing countries later this week.

The benchmark Nikkei .N225 lost 8.5 percent for the quarter and 35.3 percent for the 2008/09 business year. It lost 27.6 percent in the previous business year.

Market analysts said renewed worry about the financial system suggested conditions were likely to be rocky for a while.

"There's a sense that the recent bear market rebound may be over," said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments.

"The biggest concern is financials in Europe and the United States, which of course were the driving force of much of the rally, along with worry about U.S. automakers."

It fell 126.55 points to 8,109.53 on Tuesday after sliding 4.5 percent the previous day, its biggest one-day percentage fall in over two months. The broader Topix fell 2 percent to 773.66.

But it gained 7.1 percent for March, a seesaw month that saw the Nikkei flirt with a 26-year low just under 7,000 before rallying on signs of revival in the U.S. economy and hopes for U.S. bank lending. It was its strongest monthly performance since April 2008, when it rose 10.6 percent.

HOPES AND FEARS

Japanese Prime Minister Taro Aso is expected to unveil the outline of a new stimulus package, and market analysts said stocks briefly climbed on hopes for this before falling back.

"The government doesn't seem to have much of a sense of urgency in terms of steps required by the stock market," said Nagayuki Yamagishi, a strategist at Mitsubishi UFJ Securities.

"It seems that most steps will be merely a safety net and nothing more, though of course having a safety net is better than having nothing."

Aso has scheduled a media conference at 5 p.m. (0800 GMT), at which he is expected to map out a plan that Japanese media say is aimed at creating 2 million jobs. [ID:nT109832]

A panel of Japan's ruling Liberal Democratic Party said earlier on Tuesday it would come up with a system to allow a government agency to buy shares from the market, but most players shrugged this off due to a dearth of details.

Still, some thought that gains could lie ahead next month, after the G20 and other events is over, including the Bank of Japan's quarterly tankan corporate survey on Wednesday.

"If first quarter results for the U.S. banks are good, that may show that this particular landmine has been defused," said Masayoshi Okamoto, head of dealing at Jujiya Securities.

"I think that in either April or May we could perhaps see 9,000 for the Nikkei."

Financials dragged on the market, with Tokio Marine Holdings (8766.T), a non-life insurer, falling 5.9 percent to 2,395 yen and Mizuho Financial down 4.6 percent at 188 yen.

Top lender Mitsubishi UFJ Financial Group (8306.T) lost 2.5 percent to 476 yen.

The decline was marked by a broad range of profit-taking in shares ranging from blue-chip exporters such as Sony Corp (6758.T) to defensive shares such as pharmaceuticals.

"Investors had expected a surge of buying ahead of the end of the financial year, as frequently occurs, but when this didn't emerge, many began to sell in disappointment," said Ogawa.

Sony slipped 3 percent to 1,998 yen and Panasonic Corp (6752.T) fell 5.2 percent to 1,069 yen. Canon Inc (7751.T) shed 2.8 percent to 2,820 yen.

But IHI Corp (7013.T), a heavy machinery maker, climbed 3.7 percent to 112 yen after lifting its operating profit estimate for the year ending on Tuesday more than threefold.

Trade was moderate on the Tokyo exchange's first section, with 2.3 billion shares changing hands, in line with last week's daily average.

Declining shares outnumbered advancing ones by more than 3 to 1. (Reporting by Elaine Lies; Editing by Edwina Gibbs)