Nikkei down 1.2 pct on firmer yen, but SMFG gains

TOKYO (Reuters) - The Nikkei average fell 1.2 percent on Wednesday amid fear that U.S. congressional wrangling could delay a proposed $700 billion plan to rescue the financial sector, while exporters such as Canon (7751.T) slid on a firmer yen.

But the market pared earlier losses on hopes for a rebound on Wall Street later in the day after a report that Sumitomo Mitsui Financial Group (8316.T) may invest in U.S. investment bank Goldman Sachs (GS.N).

Market analysts said the decision by Warren Buffett's Berkshire Hathaway to invest $5 billion in Goldman Sachs was also lending support.

"The SMFG report is positive, making investors expect a rebound in U.S. stocks on hopes for a stabilizing financial system," said Yutaka Miura, deputy manager of the equity information department at Shinko Securities.

But analysts also said that uncertainty about the U.S. bailout plan was still weighing on the market.

"The market is waiting for the bailout plan to be approved by Congress, but things are not going as smoothly as initially thought," said Katsuhiko Kodama, senior strategist at Toyo Securities.

U.S. lawmakers scoffed at the huge size of the proposed bailout and its lack of detail, and U.S. stocks closed down about 1.5 percent on Tuesday on the lack of certainty over when and how Washington would act.

The benchmark Nikkei average .N225 shed 140.19 points to end the morning at 11,950.40. The broader Topix declined 1.3 percent to 1,153.65.

The Japanese market was closed on Tuesday for a national holiday. The Nikkei had risen 1.4 percent to a one-week closing high on Monday.

JAPANESE BANKS TO THE RESCUE?

Sumitomo Mitsui Financial rose 2.2 percent to 691,000 yen after Kyodo news agency reported that Japan's third-largest bank plans to invest in Goldman Sachs.

Nomura Holdings (8604.T) climbed 4.8 percent to 1,499 yen after Japan's top broker said it would buy the Asian and European operations of failed U.S. investment bank Lehman Brothers (LEHMQ.PK) to help it expand overseas.

Mitsubishi UFJ Financial Group (8306.T) advanced 3.5 percent to 929 yen after Japan's largest bank said it would take a stake in U.S. investment bank Morgan Stanley (MS.N).

"Investors like Nomura's move as it showed the firm started taking action to become the world's No.1 brokerage," said Takahiko Murai, general manager of equities at Nozomi Securities.

"But investors are divided on Mitsubishi UFJ's investment in Morgan as they don't know if it can acquire Morgan's expertise in investment banking with the move and the brokerage may announce appraisal losses in October."

Last week saw a dramatic reshaping of the financial landscape as AIG (AIG.N) was bailed out, Lehman filed for bankruptcy and Merrill Lynch MER.N was forced into partnership with Bank of America (BAC.N).

EXPORTERS DOWN

Blue-chip exporters fell as investors fret over a stronger yen, which would curb exporters' overseas profits when they are brought home.

Canon slid 3.9 percent to 4,180 yen and Honda Motor Co (7267.T) lost 3.7 percent to 3,370 yen.

The dollar was little changed at 105.44 yen after hitting a high of 105.90 yen.

Trade was light on the Tokyo exchange's first section, with 892 million shares changing hands, below last week's morning average of 1.1 billion.

Declining stocks beat advancing ones by nearly 3 to 1.

(Reporting by Aiko Hayashi; Editing by Chris Gallagher)