*Nikkei, Topix fall 5 percent to three-year lows
*Nikkei, Topix book biggest percentage drop since Jan 2008
*Financial shares battered after Lehman's bankruptcy filing
*Exporters tumble, also hurt by a stronger yen (Adds details)
By Aiko Hayashi
TOKYO, Sept 16 (Reuters) - The benchmark Nikkei average slid 5 percent to a three-year low on Tuesday, with investors dumping shares across the board after Lehman Brothers' collapse fuelled fears about the U.S. financial system and hit stock markets worldwide.
Japan's top three lenders plunged, with No. 2 Mizuho Financial Group (8411.T: Quote, Profile, Research, Stock Buzz) and No. 3 Sumitomo Mitsui Financial Group (8316.T: Quote, Profile, Research, Stock Buzz) losing about 10 percent, their worst daily percentage drops in nearly five years.
Both the Nikkei and the broader Topix index, which dropped 5.1 percent, booked their biggest percentage falls in eight months.
After a holiday on Monday, investors in Tokyo came back to work to find Lehman Brothers (LEH.P: Quote, Profile, Research, Stock Buzz) had filed for bankruptcy and Bank of America (BAC.N: Quote, Profile, Research, Stock Buzz) had agreed to buy Merrill Lynch (MER.N: Quote, Profile, Research, Stock Buzz) in the biggest financial shake-up since the Great Depression. [ID:nN13574113]
"Investors are in shock for now as they had thought Lehman would be bought and rescued, but in fact it completely collapsed," said Mitsushige Akino, chief fund manager at Ichiyoshi Investment Management.
"But we can assume the U.S. government sees some leeway in the situation, as it would have used public funds to help no matter what, had it decided that the failure of Lehman would completely batter the financial system."
With Merrill already securing help, the focus has shifted to the health of American International Group (AIG.N: Quote, Profile, Research, Stock Buzz) [ID:nSP46833]
AIG, once the world's biggest insurer, is also seriously constrained by short-term funding trouble.
The Nikkei average shed 605.04 points to end at 11,609.72, its lowest close since July 2005.
The broader Topix lost 59.63 points to 1,117.57, its lowest finish since May 2005.
Exporters such as Canon Inc (7751.T: Quote, Profile, Research, Stock Buzz) and Toyota Motor Corp (7203.T: Quote, Profile, Research, Stock Buzz) also tumbled after the yen gained sharply against the dollar, as investors ditched oil and sought stability in the yen and high-grade debt.
The dollar fell to 104.14 yen
"The difference from March when Bear Stearns collapsed is a slowdown in the global economy," said Masayoshi Okamoto, head of dealing at Jujiya Securities.
"The impact feels much bigger even though the Nikkei and the Topix are at the same level (as March)."
The Bank of Japan injected the money market with 1.5 trillion yen ($14.39 billion), its biggest cash infusion in six months, via a same-day operation on Tuesday to help ease jitters following the collapse of Lehman. [ID:nT368992] But some said they saw buying opportunities at current levels.
"The market is flooded with negative factors due to risk-aversion now, but in the long-term, it's in a buy-zone," said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments.
FINANCIALS BATTERED
Financial shares were among the biggest losers, with Japan's top lender Mitsubishi UFJ Financial Group (8306.T: Quote, Profile, Research, Stock Buzz) sinking 7.7 percent to 792 yen.
Mizuho dropped 10.7 percent to 418,000 yen and Sumitomo Mitsui lost 9.8 percent to 619,000 yen.
Japan's largest brokerage, Nomura Holdings (8604.T: Quote, Profile, Research, Stock Buzz), slid 9.8 percent to 1,303 yen.
Chiba Bank (8331.T: Quote, Profile, Research, Stock Buzz) dropped 8.8 percent to 536 yen after the regional bank said its U.S. unit holds about 5 billion yen ($48 million) worth of straight bonds issued by Lehman. [ID:nN13574113]
Aozora Bank (8304.T: Quote, Profile, Research, Stock Buzz) plunged 15.8 percent to 171 yen. The bank said its net exposure to Lehman could be under $25 million, far less than the $463 million reported in the U.S. investment bank's bankruptcy filing, due to hedging and collateral. [ID:nT11380]
Canon fell 10.1 percent to 3,840 yen, its biggest daily percentage loss in a decade and making it the second biggest drag on the Nikkei 225.
The digital camera maker was also hurt by a Nikkei business daily report that the firm was expected to report a 12 percent fall in group net profit for 2008, breaking an eight-year run of higher earnings [ID:nN12387932]. It announced a share buyback worth up to 50 billion yen ($479 million) after the close of trade. [ID:nTFA003016]
Toyota Motor skidded 3.8 percent to 4,610 yen.
Trade picked up on the Tokyo exchange's first section, with 2.6 billion shares changing hands, above last week's daily average of 2.1 billion.
Declining stocks outpaced advancing ones by a ratio of more than 6 to 1. (Reporting by Aiko Hayashi; Editing by Edwina Gibbs)
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