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Japan's Nikkei hits more than 2-month closing low

* Nikkei falls for third session in a row

* Car parts maker Tokai Rika sags after Toyota recall

* KDDI climbs after J.P. Morgan lifts price target

* Shin-Etsu Chemical rises after Nomura upgrade

By Dominic Lau

TOKYO, Oct 11 (Reuters) - Japan's Nikkei share average fell to its lowest close in more than two months on Thursday on mounting fears that upcoming corporate earnings will be weak after the U.S. results season got off to a slow start.

The Nikkei

dropped 0.6 percent to 8,546.78 points, losing ground for a third straight session. The benchmark has lost 8 percent since hitting a four-month high on Sept. 19.

Ryota Sakagami, chief equity strategist at SMBC Nikko Securities said market participants remained worried that this earnings season would produce a slew of cuts to annual forecasts as well as some negative surprises.

"However, if you look at the current prices of individual companies, they should have priced in downward revisions. The market is overreacting," he said, while adding that the Nikkei could fall as low as 8,250 in a worst-case scenario.

SmartEstimates from Thomson Reuters StarMine show expectations for an average negative earnings surprise from Nikkei 225 companies of 1.3 percent for the second quarter results under Japan's fiscal year ending March 2013.

On Wednesday, the U.S. S&P 500

fell for a fourth day after Chevron Corp said third-quarter profits would be "substantially lower" than the previous quarter, while Alcoa Inc

posted a quarterly loss and cut its outlook for global aluminum demand.

Japanese automakers and parts suppliers were under pressure after Toyota Motor Corp

said it would recall more than 7.4 million vehicles worldwide for faulty power window switches.

The sector was already faced with concerns over the impact of sluggish global growth and anti-Japanese sentiment in China over a territorial dispute between the two countries.

Car parts maker Tokai Rika Co Ltd

slumped 9.6 percent after the recall by Toyota, which lost 1.4 percent, slightly underperforming a 1.2 percent fall in rival Nissan Motor Co

.

"I would at this moment stay away from the manufacturers. Their second-quarter earnings are likely to be weak. The safe bet would be financials, real estate and these sort of domestic demand-related non-manufacturing area," said Hidehiro Tomioka, head of equity investment at Manulife Asset Management in Tokyo.

"Their earnings will alright whereas electronic companies, machinery companies and some of the basic material companies' earnings could be very bad, well below company projections for the second quarter."

The benchmark Nikkei is up 1.1 percent so far this year, trailing a 13.9 percent rise in the S&P 500 and a 9.9 percent gain in the pan-European STOXX Europe 600

index.

CANON, ADVANTEST UP ON SHORT-COVERING

Printer and semiconductor production-related companies rebounded after a recent battering on concerns over the outlook for the PC market.

"People have chosen to come in to do a bit of short-covering on some of the things that have been oversold," said a senior trader at a European bank.

Advantest Corp rose 4 percent after shedding 31 percent from Sept. 19 to Oct. 10, while Canon Inc

gained 1.6 percent, snapping a five-session losing streak.

The broader Topix

index slipped 0.4 percent to 713.95 in relatively active trade, with 1.72 billion shares changing hands, up from Wednesday's 1.59 billion and last week's average of 1.45 billion.

Other gainers included KDDI Corp

, which advanced 1.6 percent after J.P. Morgan lifted its price target on the mobile operator.

Shin-Etsu Chemical Co Ltd

added 1.4 percent after Nomura upgraded its rating on the company to 'buy' from 'neutral' and lifted its price target.

(Editing by Kim Coghill)

((dominic.lau@thomsonreuters.com)(+81 3 6441 1917)(Reuters Messaging:)(dominic.lau.thomsonreuters.com@reuters.net))

Keywords: MARKETS JAPAN STOCKS/