TOKYO, Dec 30 (Reuters) - Japan's Nikkei average dropped 1 percent to a 1-½ week low on the final trading day of the year on Thursday, pressured by profit-taking as the yen advanced to a fresh seven-week high against the dollar.
Japanese shares came under broad selling pressure as investors lightened their buy positions ahead of the New Year holidays as the yen's strengthening took market participants by surprise.
"The recent advance of the yen has been a bit unexpected and clearly having a negative psychological impact on share prices," said Takashi Ohba, a senior strategist at Okasan Securities.
"Some small-cap shares are gathering bids, but blue chip shares are under pressure. In general the market is becoming nervous about the yen's strength," Ohba said.
In midmorning trade, the benchmark Nikkei was down 1 percent or 103.38 points at 10,241.16.
It briefly fell to an intraday low of 10,238.93 -- the lowest since Dec. 20.
The broader Topix index fell 0.9 percent to 900.25.
The dollar was down 0.3 percent at 81.38 yen in Asian trade. It fell as low as a fresh seven-week low of 81.28 yen earlier.
"The Nikkei will come under stronger downward pressure should the yen firm to the 80-yen level (against the dollar), but the Nikkei is not expected to fall below 10,000 as there are many buyers waiting for price dips," a trader at a Japanese securities house said.
On charts, the Nikkei is expected to find support at its 25-day moving average, currently around 10,221.
Investors were eager to buy Japanese shares on views that they are still undervalued compared with those in other developed markets even after having gained nearly 10 percent in the last quarter of 2010. The Nikkei is down about almost 3 percent for the year.
"The Nikkei's bullish sentiment is still in place. We are hoping to see more inflows into blue chip shares from the start of the new year based on the positive market outlook," Okasan's Ohba said.
Shares of exporters fell, reflecting the stronger yen. Sony Corp dropped 1.2 percent to 2,920 yen and Panasonic lost 0.9 percent to 1,155 yen.
But Hitachi rose 0.7 percent to 428 yen following a series of reports about the country's biggest electronics conglomerate.
Mitsubishi Heavy Industries Ltd and Hitachi will jointly bid for a 350 billion yen ($4.3 billion) rail project in Bangkok, pushing the two Japanese conglomerates closer to merging their overseas rail businesses, the Yomiuri newspaper reported on Thursday.
Mitsubishi Heavy fell 1.3 percent to 305 yen.
On Wednesday, the Sankei newspaper reported the company is likely to clinch a contract for a UK rail network project as early as the start of next year.
Agility Trains, a consortium consisting of Hitachi and British infrastructure project manager John Laing, have been the preferred bidders on the contract. ($1=81.61 Yen) (Reporting by Chikafumi Hodo; Editing by Chris Gallagher)