Nikkei falls 6.8 pct on yen rise, economy worry grows

*Nikkei tumbles 6.8 pct, biggest fall in week

*Exporters battered as yen hits 4-year high on euro

*Large banks tumble on worry about earnings outlooks

*Oil's fall drags trading houses sharply lower (Adds stocks, details

By Elaine Lies

TOKYO, Oct 22 (Reuters) - Japan's Nikkei average slid 6.8 percent on Wednesday to its lowest close in a week, battered down as Sony Corp (6758.T) and other exporters fell after the yen rose against the euro and worries about the global economy deepened.

Mitsubishi UFJ Financial Group (8306.T) and other big banks tumbled after the Nikkei business daily reported they will cut their earnings outlooks, while trading houses slid after oil fell on fears of declining demand.

The yen rose to a four-year high against the euro as investors unwound risky carry trades that had used cheap funds in the low-yielding Japanese currency to buy higher-yielding assets, and as concern about the European economy grew EURJPY=R. "It's not just the currency rate per se but what it suggests about the European economy, with (French President Nicholas) Sarkozy's proposals for regular summits about the economy indicating that things there are really bad," said Fujio Ando, senior managing director at Chibagin Asset Management.

"There's fear that it's still going to get worse, and this of course will hit exporters."

The benchmark Nikkei .N225 shed 631.56 points to finish at 8,674.69, its biggest one-day percentage loss since last Thursday's plunge of more than 11 percent -- which was in turn the biggest one-day loss since the 1987 stock market crash.

The Nikkei has lost 23 percent this month but remains more than 500 points above the year's low of 8,115.41 hit on Oct 10. The broader Topix lost 7.1 percent to 889.23.

Market players said that investors were dumping shares after the Nikkei had marked three days of gains that took it up 10 percent, with roughly two-thirds of that rise now erased.

"Volatility has risen. It looks as if stocks will move up and down like an elevator for some time," said Takashi Ushio, head of investment strategy at Marusan Securities.

BANKS BATTERED, WORRY RISES

Mitsubishi UFJ's shares lost 8.8 percent after the Nikkei business daily said Japan's top lender would miss its net profit forecast for the six months ended Sept. 30 by about two-thirds due to slumping share prices and rising bad loan costs.

Mizuho Financial Group (8411.T) and Sumitomo Mitsui Financial Group (8316.T) will also cut their earnings outlooks, the paper said. [ID:nT335752]