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TOKYO (Reuters) - Japan's Nikkei share average retreated on Tuesday from the previous day's four-week high as the initially positive reception for Greece's election result was chilled by concerns about Spain's banking sector.
The Nikkei fell 0.8 percent to 8,655.87 after rallying 1.8 percent on Monday to hit its highest close since May 22.
But investor jitters about an intractable euro zone crisis pushed down the overall market.
"The Greek election didn't fix the situation; if anything the problems in Europe are only spreading," said Fujio Ando, managing director of Chibagin Asset Management. "The two-month gap between the polls also meant there was no government to get on with improving the situation either."
The market's focus switched to Spain, where bond yields hit a new euro-era high above 7 percent on Monday, a level that led Greece, Ireland and Portugal to seek international bailouts.
There are now concerns that Spain's increasing inability to finance its own debt means Madrid may need a much larger bailout than the 100 billion euro loan promised for its troubled banks last week. Bad loans at Spanish banks swelled to 8.72 percent of their outstanding portfolios in April, the highest since April 1994, according to Bank of Spain data released on Monday.
Japanese steelmakers were hit by U.S. peer AK Steel Holdings Corp (AKS.N) forecasting a second-quarter profit that fell short of analysts' expectations and refusing to issue full-year guidance because of market volatility.
Osaka Steel Co Ltd 5449.OS lost 7.3 percent, while Mitsubishi Steel Mfg Co Ltd (5632.T) and JFE Holdings Inc (5411.T) dropped 4 and 2.3 percent respectively. Tokyo Steel Manufacturing Co Ltd (5423.T), also hurt by its plan to drop prices for all contracts signed in July, shed 4.2 percent.
Japan Drilling Co Ltd (1606.T) gained 2.2 percent while JX Holdings Inc (5020.T) rose as much as 5.7 percent before closing 1.3 percent up after the Japanese government revealed plans on Monday to drill for oil and natural gas off the coast of the country's Niigata prefecture.
The broader Topix index .TOPX> fell 0.6 percent to 734.69 in low volume, with the number of shares trading hands at just 69.2 percent of its 90-day average.
Low liquidity continued to plague the market, leaving it vulnerable to large swings.
"Long term investors went quiet a long time ago when they realized that the euro zone crisis is going to take a long time to fix, so the only people reacting to the everyday flow of news are the short-term investors," said Makoto Kikuchi, CEO of Myojo Asset Management Japan. "The longs are sitting tight on firms expanding into emerging markets, like precision parts and trading companies."
Fast Retailing Co Ltd (9983.T), a heavyweight on the Nikkei, has lost some of its shine recently and is currently unattractive to foreign investors because of a price-to-earnings ratio above 20, higher than its peers, according to Kikuchi.
The operator of low-cost clothing store Uniqlo shed 1.4 percent on Tuesday after JP Morgan was the latest brokerage to deliver a downbeat outlook, slashing its target price. JP Morgan analysts cut the domestically-driven company's operating profit forecast, saying in a note "It's hard to be confident about a sales recovery... We think the stock market has already priced in high growth potential in Asia."
A G20 meeting in Mexico concludes later on Tuesday, but few market players expect it to produce any substantial measures to tackle the global slowdown.
"The G20 is meaningless posturing," said Kikuchi of Myojo Asset Management. "All they can do is say that they're working together to find a solution, they can't actually change anything. The FOMC, on the other hand, is extremely important."
On Tuesday, the Federal Reserve will begin a two-day Federal Open Committee Meeting to decide on whether to introduce further easing measures. Market consensus is that the Fed will at least extend Operation Twist, its long-term bond buying program, another three months beyond June, when it is set to finish.
Additional reporting by Dominic Lau and Mari Saito; Editing by Richard Borsuk