Japan's Nikkei falls 1.8 pct as banks, Inpex hit

* Nikkei down as financials hit by more credit worries

* Inpex falls on sharp drop in crude oil

* G8 meeting eyed for comments on fuel use (Adds stocks and comments)

By Taiga Uranaka

TOKYO, July 8 (Reuters) - The Nikkei stock average fell 1.8 percent on Tuesday, with financials such as top lender Mitsubishi UFJ Financial Group (8306.T) dropping sharply as a fresh supply of bad news kept credit concerns forefront in investors' minds.

Oil and gas field developer Inpex Holdings Inc (1605.T) fell after a sharp drop in crude prices, while big fuel users such as power utilities rose.

The Nikkei rose for the first time in 12 days on Monday, but it erased the previous day's gain immediately after the open.

"U.S. financial shares fell on concerns about a possible need for Fannie Mae and Freddie Mac to raise capital, and that should weigh heavily on Japanese bank shares as well," said Fumiyuki Nakanishi, group manager of the investment information department at SMBC Friend Securities.

U.S. bank stocks plummeted to their lowest level in a decade after Lehman Brothers estimated that a proposed accounting rule would force Fannie Mae (FNM.N) and Freddie Mac (FRE.N), the largest providers of funding for U.S. home mortgages, to raise as much as $75 billion between them.

Trade stayed thin, with many investors on the sidelines amid growing worries about a economic slowdown at home and overseas.

"In the absence of buyers in the stock market, selling triggers another sell," said Masanobu Takahashi, chief strategist at Ichiyoshi Securities.

The benchmark Nikkei .N225 ended the morning down 238.18 points at 13,121.86 after falling to 13,073.52, its lowest in nearly three months.

The broader Topix lost 1.5 percent to 1,292.53.

Japan's No.2 retailer Aeon Co Ltd (8267.T) plunged 6.6 percent to 1,218 yen ahead of its first quarter earnings announcement later in the day.

Its larger rival Seven & I Holdings Co Ltd (3382.T) is also slated to release first quarter results after the close. Seven & I fell 1 percent to 3,100 yen.

Retailers are facing a tough market, as rising prices of fuel and food have forced consumers to further trim spending on other items. That has hit the likes of general merchandising stores and department stores, which have a higher proportion of non-grocery goods.