Japan stocks slide over 2% as exporters, banks drag

(Updates with stocks, details) By Aiko Hayashi

TOKYO, May 26 (Reuters) - Japan's Nikkei stock average slid 2.2 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 fell 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."

One bright spot was Yahoo Japan Corp (4689.T), which jumped 4.6 percent, after saying on Friday it would buy back up to 60 billion yen ($581 million) worth of its own shares, or 2 percent of shares outstanding.

The benchmark Nikkei average .N225 shed 312.35 points to end the morning session at 13,699.85, breaking below the key 25-day moving average of 13,845.75.

The Nikkei closed up 0.2 percent on Friday but fell 1.5 percent for the week. As of Friday, it had rebounded nearly 20 percent since a year-low hit in mid-March.

Katsuhiko Kodama, senior strategist at Toyo Securities, said breaking and holding above 14,000 appears to be challenging for now as the market lacks upbeat news to pursue further gains.

"The market rose rather rapidly up to now and it's difficult to stay above the 25-day moving average," he said.

The broader Topix index declined 2.1 percent or 28.53 points to 1,348.16.

The Dow Jones industrial average .DJI fell 1.2 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.

EXPORTERS, BANKS DRAG

The dollar dipped 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 3.3 percent to 5,260 yen and Toyota Motor Corp (7203.T) fell 2.3 percent to 5,020 yen.

Financial shares slid as Mitsubishi UFJ declined 2.8 percent to 984 yen, No.2 bank Mizuho Financial Group (8411.T) shed 1.3 percent to 518,000 yen and Sumitomo Mitsui Financial Group (8316.T) fell 1.8 percent to 823,000 yen.

Life insurance company T&D Holdings (8795.T) skidded 5.3 percent to 6,600 yen and Millea Holdings (8766.T), Japan's largest non-life insurer, lost 4.4 percent to 4,140 yen.

"Credit worries still linger in New York, and financial shares are the first to lose ground when there's no other trading news," said Kodama at Toyo Securities.

Takefuji Corp (8564.T) lost 6.5 percent to 2,020 yen after the consumer lender said on Friday it would issue 70 billion yen worth of convertible bonds to Swiss investment bank UBS (UBSN.VX) to help shore up its capital base.[ID:nT183119]

The bonds, if converted to common stock, would dilute Takefuji's shares by as much as 18 percent.

Shares of Yahoo Japan gained 4.6 percent to 45,850 yen, becoming one of the biggest positive contributors to the Nikkei 225.

Trade slowed on the Tokyo exchange's first section, with 867 million shares changing hands, compared with last week's morning average of 1.1 billion.

Declining stocks outpaced advancing ones by nearly 8 to 1. ($1=103.30 yen)

(Editing by Brent Kininmont)