Nikkei falls over 1 pct as MUFG slips on outlook

TOKYO, May 23 (Reuters) The Nikkei average fell 1.38 percent on Tuesday as Mitsubishi UFJ Financial Group Inc. (MUFG) sank on a lower-than-expected profit outlook and Tokyo Electron Ltd. and other tech stocks fell on declines in their U.S. counterparts.

Uncertainty about the outlook for U.S. interest rates, which triggered a recent sell-off in commodities and emerging markets as well as U.S. stocks, was also worrying some investors, helping accelerate a correction in the Tokyo market after multi-year peaks hit in April.

''The market will remain jittery unless the New York market stabilises and gives us some relief,'' said Masayoshi Okamoto, head of dealing at Jujiya Securities.

The Nikkei ended the morning session 218.62 points lower at 15,639.25 after falling to as low as 15,582.86.

On Monday it lost 1.84 percent to its lowest close since March 8, finishing at 15,627.49.

The TOPIX index lost 1.75 percent to 1,587.54.

Mitsubishi UFJ Financial Group, the most active issue by value, dropped 4.9 percent to 1.55 million yen.

The world's biggest banking group by assets on Monday reported a group net profit of 1.18 trillion yen (.5 billion), the largest ever for a Japanese bank, but said its profit would likely fall 36 percent this year to 750 billion yen, short of analysts' expectations.

Selling also hit two other banks due to report full-year earnings on Tuesday --- Sumitomo Mitsui Financial Group (SMFG) and Resona Holdings Inc.

SMFG, Japan's third-biggest bank, lost 2.5 percent to 1.16 million yen and No.4 Resona was down 3.1 percent at 342,000 yen.

Yoku Ihara, manager at investment information department at Retela Crea Securities, said the Tokyo market was partly weighed down by loss-cut selling from investors who bought around the time the Nikkei hit an almost 6-year peak above 17,500 in April.

But such selling would likely peter out in the near future, while bargain-hunting demand stays strong, he said.

''I think the Tokyo market is sounding out where its floor is.

I think it would be at around 15,000-15,500, about 2,000 points below its peak,'' he said.

BARGAIN HUNTING One fund manager also said he was looking for undervalued issues given the likelihood that the global economy is still in an expansionary phase and that the momentum in Japanese companies' earnings growth will be maintained this business year.

''A flight to quality played a part in the recent sell-off.

But that looks like a temporary move,'' said Jun Nishizaki, chief portfolio manager at Nissay Asset Management.

''It's a big concern if the U.S. economy is slowing and pulling down growth in the global economy and that is behind the recent sell-off in emerging and commodities markets. But I don't think that is the case,'' he said.

He said he favours communications and steel companies, whose shares have been sold recently but their earnings could exceed market expectations.

Among the few gainers, KDDI Corp., Japan's second biggest telecoms operator, was up 0.5 percent at 741,000 yen, adding to Monday's 1.4 percent gains on news that it would soon launch Walkman brand music phones in Japan.

Tokyo Electron Ltd., the world's second-biggest chip equipment maker, slid 3.7 percent to 8,170 yen after falls in U.S. chip-related stocks sent the Philadelphia Stock Exchange's semiconductor index down over 4 percent.

Advantest Corp., the world's biggest maker of chip-testing devices, fell 3.1 percent to 11,450 yen.

Mitsubishi Electric Corp. lost 3.9 percent to 910 yen after the company said on Monday the U.S. Justice Department is looking into its dynamic random access memory (DRAM) business in the United States between 1998 and 2002 for possible antitrust violations.

Trade volume picked up with 1 billion shares changing hands on the Tokyo bourse's first section, up from last week's morning average of 914 million shares.

Decliners outnumbered advancers 1,328 to 290.

REUTERS CH VA RAI1113