Nikkei sheds 2.1 pct, retreating from 4-1/2 yr high on Cyprus concerns

* Unusual Cyprus bailout plan rattles investors

* Exporters lead losses

* Panasonic rises; considering exit from some businesses

TOKYO, March 18 (Reuters) - Japan's Nikkei share average dropped 2.1 percent on Monday morning, pulling back from a 54-month high on uncertainty over an unusual bailout proposal for Cyprus that threatens to reignite the euro zone debt crisis. Shares of economy-sensitive firms, which have rallied sharply in the past few months on Prime Minister Shinzo Abe's aggressive policies aimed at energising the economy, took a battering. The Nikkei lost 263.88 points to 12,297.07, breaking below its five-day moving average of 12,358.74 and heading for its biggest one-day percentage fall in three weeks. "We have the initial sell-off because people are worried about Europe," a senior dealer at a foreign brokerage said. "What happened in Cyprus is unprecedented ... we are looking at a capital flight as a very real situation." In a radical departure from previous rescue packages, euro zone finance ministers want to tap Cyprus' savers in order for the country to receive a 10 billion euro ($13 billion) bailout, triggering a run on cash after its announcement on Saturday morning. Cyprus was working on a last-minute proposal to soften the blow after a parliamentary vote on the measure was postponed until Monday, a government source said. Exporters came under pressure as the Cyprus news saw nervous investors seeking shelter in the safe-haven yen. Toyota Motor Corp, Honda Motor Co, Sony Corp and Canon Inc lost between 2.5 and 2.9 percent. The yen rebounded against the dollar to 94.80 yen, from 95.38 yen late on Friday. It rose as much as 93.45 yen, its highest level since March 6, moving away from a 3-1/2-year low of 96.71 struck on March 12. "News from Europe is surely weighing on the market's risk sentiment today, but I expect this is going to be rather a one-day correction," said Shun Maruyama, chief Japan equity strategist at BNP Paribas. "As long as the U.S. dollar/yen exchange rate is steady, I think there will be dip buying in the Japanese stock market. Unless today's Wall Street falls significantly, Tokyo stocks are likely to rebound tomorrow." The Japanese currency has fallen 17 percent against the dollar since mid-November after Abe called for bold fiscal expansionary and monetary easing policies to whip deflation in his election campaign. During the same time, the benchmark Nikkei has rallied 42 percent. Banks, which have also benefited from Abe's reflationary policy, fell on Monday morning, with Sumitomo Mitsui Financial Group down 2.2 percent and Mitsubishi UFJ Financial Group off 2.3 percent. The sector is still up 58 percent since mid-November, outpacing the Nikkei. Despite its sharp gain, the sector still offers cheaper valuation than the broader Topix index, with a 12-month forward price-to-earnings ratio of 11.1 versus the Topix's 13.5, according to Thomson Reuters Datastream. The Topix dropped 1.7 percent to 1,033.71 by the midday break on Monday. Panasonic Corp bucked the broad market and gained 2.9 percent after sources said the troubled consumer electronics maker was considering selling its healthcare business to raise cash. The Nikkei newspaper also said Panasonic was leaning toward withdrawing from plasma television operations as part of a downsizing of its TV business.