* Nintendo's loss forecast disappoints market * Japan's earnings optimism limit declines - analyst By Ayai Tomisawa TOKYO, Jan 20 (Reuters) - Japan's Nikkei average dropped to a one-week low on Monday, tracking declines in U.S. shares, while Nintendo Co Ltd plunged by nearly a fifth after the game maker forecast an annual loss. Nintendo slid as much as 18.5 percent to 11,935 yen - its lowest since Nov. 8 - and was the most traded stock by turnover after the "Super Mario" creator said it now expects a full-year loss instead of a profit and slashed its Wii U sales forecast by almost 70 percent. The Nikkei was down 0.8 percent at 15,606.79 in midmorning trade, trading below its 25-day moving average of 15,750.84, and extending losses into a third day. Analysts said the market may stay lacklustre as U.S. markets are closed on Monday for a holiday. Still, losses for Japanese stocks should be limited on optimism towards the quarterly reporting season due to kick off later this month, they said. "Foreign investors are picking up stocks including automakers which are expected to report strong earnings, such as Toyota and Fuji Heavy," said Takuya Takahashi, an analyst at Daiwa Securities. He added that the Nikkei should recover the 16,000-line after investors confirm that growth for corporate Japan is resilient. Exporters were mixed as the dollar was a touch softer at 104.27. Toyota Motor Corp rose 0.3 percent, Fuji Heavy Industries, which makes Subaru cars, dropped 0.8 percent, while Sony Corp shed 0.5 percent. Nintendo last traded down 12 percent at 12,880 yen. SMBC Nikko Securities, which maintained its stock rating for Nintendo at "underperform", cut its price target to 9,500 yen from 11,000 yen, saying that weak sales of the Wii U are a serious problem. The broader Topix fell 0.4 percent to 1,292.08. The JPX-Nikkei Index 400, a recently introduced gauge comprised of firms with high return on equity and strong corporate governance, dropped 0.6 percent to 11,641.60.