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UPDATE 1-Cerberus pulls out of Seibu IPO as pricing slashed

* Tentative IPO price range at 1,600-1800 yen vs earlier estimate 2,300 yen

* Cerberus says not taking part in offering

* Japan stocks down 12 pct so far this year

(Adds background on market, details on Cerberus-Seibu relationship)

TOKYO, April 9 (Reuters) - Japanese railway and property conglomerate Seibu Holdings on Wednesday slashed the price of its initial public offering and said its largest shareholder, U.S. private equity firm Cerberus, would not participate in one of Japan's biggest IPOs this year.

Seibu dropped the tentative price of its IPO by as much as 30 percent to 1,600 to 1,800 yen per share from the initial estimate of 2,300 it had announced in March.

The sharp retreat reflects weak demand from investors who had balked at the proposed pricing for Seibu at a time when Japanese stocks are down 12 percent so far this year and as confidence in the economic policies of Prime Minister Shinzo Abe has waned.

Seibu lowered the planned number of shares offered to 27.8 million from an earlier estimate of 80.9 million, saying Cerberus would not sell any of its holding in the IPO.

The private equity fund had previously planned to sell a 15.5 percent stake in Seibu. Cerberus was not immediately available for comment.

Japan's benchmark Nikkei is the worst performer among major developed markets so far this year after a 57 percent rally in 2013. The U.S. S&P 500 is flat so far this year, while the STOXX Europe 600 is up 1.7 percent.

People familiar with the Seibu IPO, who asked not to be named because of the confidential nature of discussions, said on Tuesday that underwriters had been eyeing a lower price after investors balked at the earlier estimate.

The failure of the IPO to provide an exit for Cerberus is the latest twist in a relationship that has become a symbol of tensions between Japanese management teams and foreign investors.

Cerberus led a bailout of Seibu following a scandal involving falsified shareholder records which led to its delisting in 2004. The U.S. private equity company was said to have paid an average of around 1,000 yen for each Seibu share at that time, although the fund has never confirmed its acquisition price.

Cerberus and Seibu earlier this year appeared to have set aside differences after a difficult 2013 during which they clashed over when the company should be listed and at what price. The battle included a failed attempt by the U.S. fund to take control of the Japanese company's board.

(Editing by Dominic Lau and Miral Fahmy)