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Nikkei eases to 2-mth closing low, led by Softbank

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* Nikkei down 0.2 pct; Topix advances 0.6 pct

* Nikkei falls 3.7 pct on week, worst weekly fall since May

* Softbank slumps 17 pct, in talks to invest in SprintNextel

* Fast Retailing sinks 10 pct after disappointing results

By Dominic Lau

TOKYO, Oct 12 (Reuters) - Japan's Nikkei share averageslipped to a fresh two-month low on Friday, with Softbank Corp

tumbling 17 percent after the wireless service providersaid it was in talks to invest in U.S. firm Sprint Nextel

.

But index losses were capped by gains in exporters as newsof the potential deal, which could range up to more than 2trillion yen ($25.6 billion), helped weaken the yen.

The benchmark Nikkei

eased 0.2 percent to 8,534.12,losing ground for a fifth straight session, and was down 3.7percent for the week, its biggest weekly fall since May and afourth straight week of losses.

Trade was active, with Fast Retailing

, anotherbenchmark heavyweight, sinking 10 percent after itsdisappointing results late on Thursday.

The benchmark Nikkei has fallen 8.1 percent since hitting afour-month high on Sept. 19, on concerns that this quarterlyearnings season will be weak due to sluggish global growth. Theindex is still up 0.9 percent this year.

Softbank is looking at a controlling stake in Sprint worthmore than 1 trillion yen ($12.8 billion), sources said, and thetalks have spurred speculation that the Japanese firm could alsomake a run at other companies via Sprint, potentially costing 2trillion yen.

Softbank's stock slid to a more than four-month low andsuffered its biggest ever one-day percentage drop, w iping n early$7 billion o f f its market capitalisation, a s investors raisesconcerns that the deal would be too costly and have no synergywith its Japanese business.

"The strong yen is probably one of the reasons for Softbankto acquire overseas assets but I don't think this deal will begood for Softbank," said Yasuo Sakuma, portfolio manager atBayview Asset Management.

"For Sprint, this seems a must-do deal while it's not forSoftbank."

The stock was the most-traded on the main board by turnover.Softbank's rival, KDDI Corp

advanced 1.2 percent andwas the fourth-most traded stock.

The news of a potentially huge deal helped soften the yen to78.41 against the dollar, down from Thursday's high of 77.94.

That lifted exporters, which have been battered recently byconcerns over their earnings.

"In some sense, (Softbank Chairman Masayoshi Son) hasactually weakened the yen. The market's gone up, his stock'sgone down," a sales trader at a foreign bank said.

"It's a huge deal. Often when the market turns, it oftencomes from big M&A."

Toyota Motor Corp, Canon Incand TDK Corp

were up between 1.1 and 2.4 percent.

The broader Topix

advanced 0.6 percent to 718.32,with 1.73 billion shares changing hands, up from Thursday's 1.72billion and last week's average of 1.45 billion.

Fast Retailing, the operator of the casual clothing chainUniqlo, was the second-most traded issue after its full-yearoperating profit came in below market expectations, whileinvestors were also disappointed with its earnings guidance forthis business year.

(Editing by Richard Pullin)

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

Keywords: MARKETS JAPAN STOCKS/