Japan Nikkei nearly flat, financials weigh

(Updates to midmorning)

TOKYO, May 20 (Reuters) - Japan's Nikkei stock average was nearly flat on Tuesday as financial shares weighed but exporters such as Hitachi Ltd (6501.T) rose on the yen's retreat against the dollar and trading houses extended gains on high commodity prices.

Top lender Mitsubishi UFJ Financial Group (8306.T), due to announce its results later in the day, slipped along with retailers such as Fast Retailing (9983.T)

Yahoo Japan (4689.T) was down 0.4 percent at 44,900 yen after a person familiar with the discussions said Microsoft Corp (MSFT.O) has proposed to buy Yahoo Inc's (YHOO.O) search business and take a minority stake in the Web pioneer, stopping short of a full-out merger. [ID:nN19435039]

As part of the deal, Yahoo would sell its Asian assets including significant minority stakes in Yahoo Japan and China's Alibaba Group, while Microsoft would buy a chunk of what remains of the company, the source said.

Market players said shares were vulnerable in the absence of strong buying factors, but that buying on dips from a variety of investors would help to limit losses.

"There is a growing sense that the market overshot during its rises last week, so now there's some light profit-taking in connection with that," said Takashi Ushio, head of the investment strategy division at Marusan Securities.

"The results are all pretty much out, so there's an absence of fresh incentives to move either way right now."

The benchmark Nikkei .N225 slipped 0.01 percent to 14,268.35 yen, while the broader TOPIX rose 0.3 percent to 1,408.30.

The dollar was fetching around 104.28 yen JPY=, down from earlier levels around 104.44 yen. While exporter shares remained up they were trimming their earlier gains in tandem with the dollar's moves.

Hitachi was up 3.7 percent at 728 yen, while Canon Inc (7751.T) was up 1.1 percent at 5,680 yen and Sony Corp (6758.T) was up 1.2 percent at 5,240 yen, both helping to support the Nikkei overall.

Mitsubishi Corp (8058.T) was up 2.1 percent, extending strong gains made on Monday on the back of high oil and commodity prices. Fellow trading house Sumitomo Corp (8053.T) climbed 1.7 percent to 1,599 yen and Marubeni Corp (8002.T) was up 2.5 percent at 979 yen.

Mitsubishi UFJ Financial Group was down 1.4 percent at 1,070 yen, while No.3 bank Sumitomo Mitsui Financial Group (8316.T) was down 0.7 percent at 877,000 yen. (Reporting by Elaine Lies, editing by Brent Kininmont)