Nikkei slips 1.3 percent as fear and optimism war

* Nikkei slips 1.3 percent

* Investors torn between optimism over Fed, fear over economy

* Exporters pare losses as yen pulls back, but still down

* Defensive shares provide support, but some are sold (Adds stocks, details)

By Elaine Lies

TOKYO, Nov 26 (Reuters) - Japan's Nikkei average fell 1.3 percent on Wednesday as a weaker yen helped exporters such as Canon Inc (7751.T: Quote, Profile, Research, Stock Buzz) cut losses and optimism over a U.S. Federal Reserve bailout warred with fears over the global economy. Panasonic Corp (6752.T: Quote, Profile, Research, Stock Buzz) shed well over 3 percent after Goldman Sachs said it had broken off talks for now on the possible sale of Goldman's shares in Sanyo Electric Co Ltd (6764.T: Quote, Profile, Research, Stock Buzz), while car makers fell after more poor U.S. data underlined its bad economy.

Still, not all the news was bad. Elpida Memory, battered by heavy selling in recent weeks, soared 22.7 percent to rise by its daily limit after the Nikkei business daily reported the chipmaker has developed the world's smallest dynamic random access memory (DRAM) chip. Though the market welcomed the Federal Reserve's massive new programme to aid the beleaguered American consumer, a programme that helped the Dow and S&P 500 extend gains on Tuesday, many players noted that numerous problems remain and have yet to be adequately dealt with.

"The Fed appears to have moved quickly, but how soon will this policy actually have an impact? In a way, its scale underlines how serious the situation is," said Takashi Ushio, head of the investment strategy division at Marusan Securities.

"The problems of GM and Ford still remain, so there's still a lot of uncertainty."

The Fed said it will buy up to $100 billion of debt issued by government-sponsored mortgage enterprises Fannie Mae (FNM.P: Quote, Profile, Research, Stock Buzz), Freddie Mac (FRE.P: Quote, Profile, Research, Stock Buzz) and the Federal Home Loan banks. It will also purchase up to $500 billion of mortgage securities backed by Fannie Mae, Freddie Mac and Ginnie Mae. [ID:nN25261467]

The central bank also teamed up with the Treasury Department to launch a $200 billion facility to support consumer finance.

In very thin trade, the benchmark Nikkei .N225 had shed 110.71 points to 8,213.22, while the broader Topix .TOPX was down 1.7 percent to 817.22 as investors grappled with the meaning and potential of the recent U.S. moves.

"As far as the U.S. financial sector goes, it seems as if the worst is over, and (President-elect Barack) Obama is moving very energetically on the economy," said Takahiko Murai, general manager of equities at Nozomi Securites. "But there is also a sense it may already be too late." WARY EYE ON YEN Investors were carefully watching the moves of the yen, which was edging up against both the dollar and the euro although it was off earlier highs .

"The market has gained some confidence after the Fed put that much money into its bailout, the only thing I'm really worried about right now is currencies," said Tomomi Yamashita, a fund manager at Shinkin Asset Management.

Exporters were hit by a report showing the U.S. economy shrank at a faster rate in the third quarter than was originally estimated, while the fall in U.S. house prices accelerated. [ID:nN25493180]

Toyota Motor Corp (7203.T: Quote, Profile, Research, Stock Buzz) was nailed by the stronger yen, the poor U.S. economic outlook, and its first ratings cut in a decade by a major ratings agency to become the fourth-largest drag on the Nikkei 225 by volume weight.

Fitch Ratings said it had downgraded Toyota's long-term foreign and local currency issuer default ratings and senior unsecured debt ratings to AA from AAA. Toyota shares fell 4.6 percent to 2,985 yen.

Honda Motor Co (7267.T: Quote, Profile, Research, Stock Buzz) fell 1.9 percent to 2,050 yen and Canon Inc (7751.T: Quote, Profile, Research, Stock Buzz) lost 2.9 percent to 2,820 yen. Hitachi Ltd (6501.T: Quote, Profile, Research, Stock Buzz) fell 4 percent to 429 yen.

Panasonic, the world's largest maker of plasma TVs, said this month that it wanted to buy smaller rival Sanyo but had not set a price with Goldman and Sanyo's two other main shareholders [ID:nT305137]. It lost 3.6 percent to 1,347 yen.

While the market was bolstered by a strong showing by communications shares and some defensive stocks such as soy sauce giant Kikkoman Corp (2801.T: Quote, Profile, Research, Stock Buzz), other defensives were sold.

Elpida climbed to 432 yen after the Nikkei report, and the company confirmed that the new 1-gigabit DDR3 DRAM chip, using a 50-nanometre process, is less than 40 square millimetres. It plans to start mass production during the January-March quarter in 2009.

Trade was very thin, with 1.67 billion shares changing hands on the Tokyo exchange's first section compared with last week's daily average of 2.1 billion, the lowest since mid-September.

Declining shares outnumbered advancing ones by nearly 3 to 1.

(Reporting by Elaine Lies; editing by Sophie Hardach)