Nikkei retreats from 10-mth highs, awaiting Fed

* Nikkei tracks U.S. stocks lower, profit-taking emerges

* Gains above 11,000 yen tough without strong results, data

* Astellas extends losses on looming competition, ratings cut

By Elaine Lies

TOKYO, Aug 12 (Reuters) - Japan's Nikkei average pulled back from 10-month highs on Wednesday, as concerns over a U.S. economic recovery grew after an unexpectedly large drop in wholesale inventories and negative comments about the banking sector from a prominent analyst.

Analysts said investors were locking in profits ahead of the end of a Federal Reserve board meeting and the issuance of its policy statement, with attention on whether it will unwind some of the quantitative easing policies currently in place.

Astellas Pharma Inc (4503.T) extended losses by 3.8 percent on looming competition and a ratings downgrade after Novartis said during Tokyo market hours on Tuesday that its Sandoz unit has launched the first generic version of Astellas' Prograf transplant drug [ID:nT344249].

"There's some concern that the Nikkei has been overbought, and that put together with an inability to read what the Fed might do is leading to profit-taking," said Takashi Ushio, head of the investment strategy division at Marusan Securities. But analysts said falls were limited by buying on dips by a broad range of investors, including foreign investors, who have been net buyers of Japanese stocks for five straight days.

The benchmark Nikkei .N225 shed 0.8 percent or 82.50 points to 10,502.96 after rising to a 10-month high of 10,587.36 on Tuesday. The broader Topix fell 0.9 percent to 964.78.

"I wouldn't go so far yet as to call what's happening now an adjustment, but for the Nikkei to rise past 11,000 we need to see proof of quite a sharp recovery in earnings," said Ushio.

Worries about the sturdiness of the U.S. economic recovery were fed by a government report showing U.S. wholesalers cut their inventories of unsold golds for a 10th straight month in July, suggesting businesses remain sceptical about a return in demand. [ID:nN11524774]

Additional concern arose after Rochdale Securities analyst Richard Bove painted a gloomy outlook for the U.S. banking industry, saying he expected a short-term pull-back in bank stock prices and sending the S&P 500 financial sector .GSPF down 3.5 percent.

But the Nikkei shrugged off data showing Japanese wholesale prices fell a record 8.5 percent in July from a year earlier, highlighting growing deflationary pressure in the economy and limiting the Bank of Japan's scope for ending its unorthodox policy measures.

EXPORTERS SLIP

Though the yen advanced against the dollar, which shed 0.3 percent against the Japanese currency to 95.71 yen JPY=, market players said the correlation between equities and foreign exchange was weakening a bit.

"Earnings are improving and there are signs of strengthening demand, particularly in the electronics and autos sectors, that suggest shares of those companies will do well even if the dollar slips 1 or 2 yen," said Hideyuki Ishiguro, a manager at the investment information section of Okasan Securities.

"In addition, the current dollar/yen rate is higher than the rate many companies have set to forecast earnings, meaning that their earnings won't be that affected by a small shift either." Canon (7751.T) slipped 0.9 percent to 3,450 yen, Sony Corp (6758.T) fell 1.3 percent to 2,735 yen, and Honda Motor Co (7267.T) lost 2.2 percent to 3,050 yen.

Astellas Pharma, Japan's No.2 drugmaker, slipped 3.8 percent following the Novartis announcement and after UBS Securities cut its rating on Astellas to "neutral" from "buy," while Nikko Citi lowered its target price for the company to 3,700 yen from 3,800 yen despite keeping its "neutral" rating.

But Nippon Sheet Glass (5202.T) bucked the trend to extend gains after Tuesday's jump, rising 2.3 percent to 363 yen as foreign investors snapped up shares of companies with a large global presence amid economic recovery expectations, a market analyst said.

Trade was thin on the Tokyo exchange's first section, with 851 million shares changing hands, below last week's morning average of 962 million.

Declining stocks outnumbered advancing ones by nearly 3 to 1. (Reporting by Elaine Lies; Editing by Joseph Radford)