* Nikkei below 25-day moving avg,but further big drop unlikely
* Nikkei ripe for profit-taking after 50% climb since March
* Financial shares drop amid broad sell-off, retailers down
By Elaine Lies
TOKYO, Sept 2 (Reuters) - Japan's Nikkei stock average slid 2.5 percent on Wednesday, dragged down by exporters hit by a stronger yen amid renewed worry about the health of the U.S. financial system.
Elpida Memory plunged more than 17 percent after Japan's sole maker of PC memory said it would issue new shares to raise up to $844 million, while retailers including Aeon Corp fell amid a broad market sell-off.
Financial shares fell on Wall Street after Sanford C. Bernstein Research downgraded American International Group to "underperform" from "market perform", and said there was no reason for shareholders to continue owning the stock, leading it to plummet on Tuesday.
"Given that the one-year anniversary of the Lehman Brothers failure is approaching, investors are especially easy to spook about financial shares. The whole sector is very sensitive to bad news," said Noritsugu Hirakawa, a strategist at Oksasan Securities.
"Certainly indicators in various nations have been improving, but the fact that markets have been falling despite this suggests that a bit of downward adjustment may be in the offing."
In a possible sign of this, the Nikkei broke below its 25-day moving average, which currently comes in around 10,400 and had been acting as a support for nearly the last week.
The benchmark had pared losses slightly to shed 267.81 points to 10,262.25 by midafternoon, after falling as much as 2.9 percent. The broader Topix lost 2.2 percent to 947.87.
"The fall below the 25-day moving average is probably only temporary, but does suggest some adjustment ahead," said Okasan's Hirakawa.
"Still, at this point there's nothing bad enough to take it below 10,000, which I think will hold for a while."
Other market players said the day's falls were mainly just profit-taking, noting that the market had risen about 50 percent from its March lows.
The S&P 500 fell 2.2 percent on Tuesday to 998.04 as scepticism that stocks can add to a nearly 50 percent rally over the last six months prevailed in the market.
The fall came despite data showing the Institute for Supply Management's (ISM) closely watched barometer of U.S. factory activity jumped to 52.9 from 48.9 in July, the highest level since June 2007.
The dollar pared losses to stand flat at 92.85 yen. Earlier, the Japanese currency had spiked to a seven-week high against the greenback and the euro as renewed fears about the financial sector made investors cautious about riskier assets.
Among exporters, Canon Inc lost 2.8 percent to 3,500 yen. Advantest Corp, a chip-tester maker, shed 2.7 percent to 2,305 yen and electronics parts maker Kyocera Corp declined 1.9 percent to 7,590 yen.
Seven & I Holdings, Japan's largest retailer, sank 3.6 percent to 2,150 yen after it cut its full-year operating profit forecast by 12 percent as a cool summer exacerbated weak consumer spending that has hit the firm and rival stores.
Other retailers were also lower, with rival Aeon tumbling 4.9 percent to 925 yen and Fast Retailing, the operator of the casual-clothing chain Uniqlo, dropping 3.3 percent to 10,480 yen. (Reporting by Elaine Lies; Editing by Chris Gallagher)