Nikkei falls 0.7 pct after rally, Fed decision eyed

* Nikkei falls 0.7 pct after gaining over 5 pct on Monday

* Investors await the outcome of the U.S. Fed rate decision

* Morinaga & Co up after report on merger with Morinaga Milk (Adds stocks, details)

By Aiko Hayashi

TOKYO, Dec 16 (Reuters) - The Nikkei average fell 0.7 percent on Tuesday as investors locked in recent gains ahead of an interest rate decision by the U.S. Federal Reserve, while Honda Motor (7267.T) and other exporters were hurt by a firmer yen.

Nippon Steel Corp (5401.T) and other steel makers tumbled after the Nikkei business daily said Toyota Motor Corp (7203.T) plans to ask for a cut in steel prices of about 30 percent amid slower demand. [ID:nT156065]

But confectionery maker Morinaga & Co (2201.T) climbed after a report that it was in talks to merge with dairy product firm Morinaga Milk Industry Co (2264.T).

"Today's fall is simply due to profit-taking," said Fumiyuki Nakanishi, manager at SMBC Friend Securities.

"Investors are closing out as they want to see the size of the U.S. rate cut, because depending on the result, currencies will move."

The benchmark Nikkei .N225 slipped 56.50 points to 8,608.16, after falling over 2 percent at one stage. It gained 5.2 percent the previous day.

The broader Topix declined 1.4 percent to 835.07.

The market is awaiting the outcome of a Fed policy meeting on Tuesday, and the Fed is widely expected to cut rates by at least a half percentage point to 0.50 percent.

Investors will also scrutinise the accompanying statement for clues on what alternative policy steps the central bank will take to dispel the recession.

Trade was light on the Tokyo exchange's first section, with 949 million shares changing hands, compared with last week's morning average of 1 billion.

Declining shares outpaced advancing ones by nearly 3 to 1.

"What we saw is light volume that is particular to pre-event trade. Investors are waiting to see the outcome of the Fed meeting, as they lack any other significant trading factor," said Takahiko Murai, general manager of equities at Nozomi Securities.

EXPORTERS DOWN

The dollar dropped 0.1 percent to 90.53 yen JPY= but stayed above a 13-year low of 88.10 yen hit on Friday. Investors fret over a stronger yen as it curbs Japanese exporters' overseas profits when they are repatriated.

Shares of Honda dropped 4.6 percent to 1,990 yen, while Sony Corp (6758.T) lost 4.4 percent to 1,853 yen and Kyocera Corp (6971.T) shed 2.2 percent to 6,250 yen.

Nippon Steel declined 4.1 percent to 284 yen, while JFE Holdings Inc (5411.T) lost 4.7 percent to 2,430 yen and Sumitomo Metal Industries Ltd (5405.T) was down 2.3 percent at 216 yen.

Confectionery maker Morinaga & Co jumped 6.8 percent to 204 yen, though Morinaga Milk, the nation's No.2 dairy product firm, was flat at 347 yen after a report they would create a food company with annual sales of about 760 billion yen ($8.4 billion). [ID:nT181384]

In separate statements, both Morinaga Milk and Morinaga & Co said the report was incorrect.

Toyo Denki Seizo (6505.T) was awash with sell orders after Nidec Corp (6594.OS), the world's largest maker of motors for hard disk drives, said it was scrapping its $325 million bid to buy Toyo Denki, the maker of motors for railway cars. [ID:nT134089]

Orders for Toyo Denki were indicated at 258 yen, down by its daily limit from from Monday's close of 338 yen. Nidec rose 0.6 percent to 3,520 yen. (Reporting by Aiko Hayashi; Editing by Edwina Gibbs)