Nikkei down as economic gloom deepens, banks hit

* Nikkei slides as domestic economy worries grow

* Banks drag in wake of disappointing U.S. peer earnings

* Market waiting for Toyota results at 0600 GMT (Adds stocks, details)

By Elaine Lies

TOKYO, Aug 7 (Reuters) - The Nikkei stock average sank 1.2 percent on Thursday, defying a range of potentially positive factors as gloom about the economy led to profit-taking, while banks such as Mizuho Financial Group (8411.T) fell after disappointing results from U.S. peers. But the slide was limited by gains among some exporters, while oil and gas field developer Inpex Holdings Inc (1605.T) climbed on a brokerage upgrade. Much of the market activity centred on individual factors linked to specific shares, such as an outlook cut and ratings downgrade that sent air-conditioner maker Daikin Industries Ltd (6367.T) heading for its biggest one-day loss since 1992.

"Certainly the environment is one that should be positive, with the weaker yen and lower oil prices," said Hideyuki Ishiguro, supervisor at the investment strategy department at Okasan Securities.

"But the idea that Japan's economy isn't good is spreading, and the weaker yen now is starting to appear to be the result of this rather than simple risk avoidance, so it's not having its usual positive impact," he added.

A weaker yen boosts Japanese exporters by making their goods more competitive overseas and increasing profits when repatriated.

Japan's longest post-war economic expansion may be over, government figures showed on Wednesday, as an index of indicators including industrial output and corporate profits sank in June. [JPCIIN=ECI]

This sense of gloom lingered on Thursday even though core private-sector machinery orders, a key gauge of corporate capital spending, fell 2.6 percent in June, smaller than economists' consensus forecast for a 9.6 percent drop. [JPMORD=ECI]

The benchmark Nikkei .N225 shed 161 points to 13,093.89 while the broader Topix fell 1.6 percent to 1,257.38.

SENSE OF SLOWDOWN

"There's been a growing sense since last week that Japan's economic slowdown is worsening, and foreign investors are starting to take a dimmer view of the market," said Katsuhiko Kodama, senior strategist at Toyo Securities.

But he also noted that trade was volatile and that the market could reverse itself and turn positive later in the day. Toyota Motor Corp (7203.T) will announce results after the close, with profit seen sliding by about a third, but market attention is on its full-year forecasts and whether another downward revision will emerge. Its shares were down 1.3 percent at 4,580 yen.

Banks dragged on the market after American International Group Inc (AIG.N), the world's largest insurer, posted its third consecutive quarterly net loss on Wednesday, hurt again by the write-down of derivatives linked to bad mortgage investments.

"These results came out after the close, so investors are wary since Wall Street hasn't really had a chance to process them yet," Kodama said.