* Options settlement triggers profit taking
* Gains in Fast Retailing limit benchmark's losses
* Nikkei falls 0.4 percent on the week
* Foreigners buy Tokyo stocks for 10th straight week
* Weekly volume at 8-mth high
By Antoni Slodkowski and Ayai Tomisawa
TOKYO, Jan 14 (Reuters) - Japan's Nikkei stock average fell 0.9 percent and away from 8-month highs on Friday, after a surprisingly weak settlement of options for January and a stronger yen against the dollar triggered profit-taking.
The Nikkei's decline ran counter to early expectations for a rise as brisk earnings from Intel Corp lifted hopes for technology spending, but market participants also said the benchmark was ripe for profit-taking ahead of a three-day weekend in the United States.
But losses were limited as Fast Retailing, one of the biggest Nikkei components on a weighted basis, surged 6 percent after it kept its annual earnings outlook intact despite weak first-quarter sales and on a rating hike from Nomura Securities.
Although it is unusual for settlements of just options to have a big effect on the market, expectations of a strong settlement following a surprisingly robust one for futures and options last month were betrayed.
"It must have been a big negative surprise to most people...especially those who had expected that the contracts would settle higher like last month," said Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities.
In active trade, the Nikkei 225 stock average fell 0.9 percent, or 90.72 points, to 10,499.04, and shed 0.4 percent on the week.
The broader Topix lost 0.8 percent to 930.31.
Some market players said that many traders holding 11,000 yen and 10,500 yen call options were particularly badly hit.
"This market is totally ignoring fundamentals. Those who bought call options above 10,500 must be suffering big losses," said Fujito.
OVERHEATED
Market had also looked overheated on the charts, with the Nikkei having pierced its upper Bollinger Band in the last five trading sessions, indicating its short-term uptrend was overstretched.
The Nikkei has gained some 2 percent this year and is up 15 percent since the start of November -- a rally driven by foreign funds which have boosted their weighting in Japanese stocks to neutral from underweight.
Foreign investors were net buyers of Japanese equities for a 10th straight week, purchasing a net 265.6 billion yen ($3.2 billion) of Japanese stocks last week, data showed on Friday.
"More and more investors are selling bonds and buying equities as risk appetite increases, but recently we're also seeing inflows from speculators that have made profits on surging commodity prices," said Hiroaki Kuramochi, chief equity marketing officer at Tokai Tokyo Securities.
The Reuters-Jefferies CRB Index, a global commodities benchmark, hovered around 27-month highs on Thursday.
Volume was heavy, with 2.5 billion shares changing hands on the Tokyo Stock Exchange's first section. Its weekly average was the highest in eight months at 2.3 billion shares.
Recent heavy volume shows institutional foreign investors have came back to the Tokyo market, among them European pension funds, market players said.
Exporters lost ground as lower U.S. bond yields helped push the dollar to a one-week low of 82.47 yen. Sony Corp shed 1.2 percent to 2,941 yen while Mitsubishi Motor dropped 2.5 percent to 118 yen.
Japan's prime minister appointed a fiscal hawk to a key post and replaced his deputy in a cabinet revamp on Friday to cope with a divided parliament and help rein in public debt, but the market's reaction was muted.
"The ruling party has to pass the budget first. We can only begin thinking of the market implications of the reshuffle when the ruling party is running parliament smoothly," said Hidenori Suezawa, chief strategist at Nikko Cordial Securities.
Chipmakers climbed on Intel's strong results. Chip gear maker Tokyo Electron Ltd gained 3.2 percent to 5,550 yen, while semiconductor grinding and cutting equipment maker Disco Corp rose 3 percent to 5,180 yen.
But Daikin Industries fell 2.3 percent to 2,891 yen after the company's CEO told Reuters it is considering buying out U.S. rival Goodman Global in what could be a $4 billion deal.
A total of 937 issues declined while 581 issues advanced. (Additional reporting by Shinichi Saoshiro; Editing by Edwina Gibbs)