Nikkei slides 3.6 pct on economy fears, Toyota shock

*Nikkei falls 3.6 pct but pares earlier losses

*Toyota sinks 9.2 percent after profit warning

*Bargain hunting and hopes of Wall St rise lift Nikkei

*Panasonic announces plans to make Sanyo a subsidiary

*Nikkei ekes out positive week, second in a row (Adds Panasonic)

By Elaine Lies

TOKYO, Nov 7 (Reuters) - Japan's Nikkei average dropped 3.6 percent on Friday, as growing global economic worries sent the yen higher and hit exporters, with Toyota Motor Corp (7203.T: Quote, Profile, Research, Stock Buzz) tumbling after a shock profit warning.

Trade was volatile, with the Nikkei falling as much as 7 percent but later coming within a breath of turning positive as investors sought to snap up big-name shares at low prices. Toyota slid 9.2 percent, dragging down other auto stocks with it, after warning that profits this year would hit a 13-year low, as the financial crisis cripples demand for its cars and sends the yen higher. [ID:nT27754]

The world's largest automaker, hit by an early report of weaker earnings on Thursday, has lost nearly a fifth of its value over the past two days. "Toyota is a company that symbolises Japan, so there's a sense that its forecast cut really shows that all of Japan's economy is doing poorly," said Takahiko Murai, head of equities at Nozomi Securities.

Trading firms suffered a day after oil tumbled below $60 a barrel, with weakening demand underscoring the dire nature of the challenges facing the global economy. The International Monetary Fund said on Thursday the world's developed economies are headed for the first full-year contraction since World War II and governments should ramp up spending. [ID:nN06313350]

The IMF now expects the U.S. economy to contract by 0.7 percent next year. It sees a contraction of 0.2 percent in Japan's economy in 2009, down from its previous forecast of 0.5 percent growth.

In moderate trade, the Nikkei ended down 316.14 points at 8,583.00, its lowest close this month, after a week of turbulent trade that saw it finally eke out a gain of 0.1 percent for its second successive week of gains.

The broader Topix lost 3.3 percent to 879.00.

U.S. stock futures edged higher and were up 1.2 percent by late afternoon DJc1, with some market players saying the gains were in anticipation of an advance on Wall Street and also helped to boost the Nikkei.

In another keenly awaited bit of news, Panasonic Corp (6752.T: Quote, Profile, Research, Stock Buzz) said after the close that it aims to make Sanyo Electirc Co Ltd (6764.T: Quote, Profile, Research, Stock Buzz) its subsidiary, a move that will create Japan's largest electronics maker. [ID:nT305137]

The move had been widely expected after sources told Reuters the companies had agreed in principle to such a deal, which one brokerage analyst has estimated could be worth up to $8.8 billion.

Panasonic lost 3.8 percent to 1,528 yen and Sanyo shed 0.49 percent to 203 yen prior to the announcement.

TOYOTA TUMBLE

But attention throughout the day centred on Toyota, which spent the morning overwhelmed with sell orders.

Trade began soon after the midday break with Toyota down 13.6 percent, but it later pared its losses, partly on relief that it was being traded at all.

"The warning was a shock at first, but finally Toyota was traded. This came at the same time as a slightly weaker yen which helped set off short-covering across the board," said Mitsushige Akino, chief fund manager at Ichiyoshi Investment Management.

Others said the bad news had likely been factored in to an extent.

"With U.S. carmakers hit so hard it would be surprising for Toyota to be unscathed," said Nagayuki Yamagishi, strategist at Mitsubishi UFJ Securities.

"It may actually be a good thing to have all of this bad news out in the open now."

Fellow carmakers tumbled, with Honda Motor Co (7267.T: Quote, Profile, Research, Stock Buzz) losing 8.7 percent to 2,260 yen and Nissan Motor (7201.T: Quote, Profile, Research, Stock Buzz) down 7.3 percent to 422 yen. Auto parts maker Denso Corp (6902.T: Quote, Profile, Research, Stock Buzz) plunged 15 percent to 1,756 yen.

Trading company Mitsui & Co (8031.T: Quote, Profile, Research, Stock Buzz) tumbled 8.8 percent to 943 yen on the back of the slide in oil prices. [O/R]

"There's still a lot of worry about the economy, and one big symbol of that is the tumble in oil prices due to a drop in demand on the dark economic outlook," said Yamagishi.

Fellow trading house Mitsubishi Corp (8058.T: Quote, Profile, Research, Stock Buzz), Japan's largest trading firm, slid 4.4 percent to 1,527 yen while Itochu Corp (8001.T: Quote, Profile, Research, Stock Buzz) fell 4.9 percent to 504 yen.

Trade was moderate on the Tokyo exchange's first section, with 2.7 billion shares changing hands, compared with last week's daily average of 3.01 billion.

Declining stocks outpaced advancing ones by more than 4 to 1. (Reporting by Elaine Lies; Editing by Edwina Gibbs)