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Nikkei drops on profit taking in cyclical stocks; financials ease

Ayai Tomisawa

* Banks, insurers underperform on falling U.S. yields

* Companies with high exposure to China lose ground

* Pigeon Corp tumbles after keeping full-year forecast

TOKYO, Dec 4 (Reuters) - Japan's Nikkei fell on Tuesday morning as investors took profits on cyclical stocks that rallied the day before, while falling U.S. bond yields pressured financial companies.

The Nikkei share average fell 0.7 percent to 22,418.87 by the midday break, after rising to a two-week high on Monday as investors took heart after the United States and China suspended the imposition of new tariffs on the weekend.

Analysts said that the market had priced in the Sino-U.S. trade truce and was looking to more events ahead, such as the U.S. Federal Reserve's policy meeting later this month.

"Putting off trade talks served as a positive catalyst to the market, but the market moved past it quicky," said Katsuhiko Nakamura, a senior technical analyst at Mizuho Securities.

"Whether the market ends the year on an upbeat note or not will depend on Fed policy and oil price moves."

Falling oil prices, hit by oversupply concerns, have been one of the worries pressuring stocks.

The Nikkei has shed 1.4 percent so far this year. If it ends in positive territory for 2018, it would be the seventh straight year of gains since the Abenomics-inspired rally started in 2012.

Banks and insurers, which typically accumulate higher-yielding products such as foreign bonds in their portfolios, lost ground after the U.S. benchmark 10-year yield slipped to 2.966 percent, the lowest since Sept. 13.

Mitsubishi UFJ Financial Group dropped 1.5 percent, Sumitomo Mitsui Financial Group stumbled 2 percent, while Dai-ichi Life Holdings shed 1.6 percent.

Companies with high exposure to China that rallied on Monday lost ground on profit-taking. Factory automation equipment maker Yaskawa Electric shed 3.2 percent and construction equipment maker Hitachi Construction Machinery declined 2.8 percent.

Baby bottle maker Pigeon Corp dropped more than 3 percent after the firm's decision to keep its full-year outlook unchanged disappointed investors, although its net profit for the February-October period rose 17 percent on the year to 12.2 billion yen.

Tea beverage maker Ito En stumbled 3.3 percent after its net profit for the May-October period dropped 5.9 percent on the year to 8.698 billion yen, pulled down by a special loss related to torrential rain that hit Japan in July.

The broader Topix fell 1.1 percent to 1,671.24. (Editing by Jacqueline Wong)