* Nikkei pares losses in afternoon as yen retreats slightly
* Consumer lenders soar on news govt may ease lending rules
* Worries about financials on Citi, CIT fade - analysts
By Elaine Lies
TOKYO, Nov 2 (Reuters) - Japan's Nikkei stock average fell 2.2 percent on Monday after earlier hitting a three-week low, with exporters hit by a stronger yen and weak U.S. consumer spending data that sparked a a broad Wall Street sell-off. But shares of Aiful Corp and other Japanese consumer lenders soared on Monday after a source said the government may ease regulations that have crippled the industry and raised hurdles for small businesses to get loans.
The Nikkei pared losses by mid-afternoon as the yen retreated slightly.
Tokyo analysts also said that while investors had been spooked by the bankruptcy filing of U.S. lender CIT Group and concerns about Citigroup's balance sheet, these were no longer a major market factor. "If, for example, there was worry the way there was when Lehman failed, there would have been much sharper falls," said Nagayuki Yamagishi, a strategist at Mitsubishi UFJ Securities.
"The CIT failure appears much more managed, much more like GM in that way. It's not at all the same thing."
CIT's bankruptcy, one of the largest in U.S. corporate history, had been widely expected for months, but it could further constrict credit and weigh on the fragile U.S. economy. Accounting expert Robert Willens said Citigroup was likely to have a $10 billion fourth-quarter charge on its deferred tax assets.
The benchmark Nikkei shed 227.22 points to 9,807.52 after earlier falling as much as 3 percent, to 9,736 -- its lowest point since Oct. 7.
The broader Topix fell 1.8 percent to 878.81.
The S&P lost 2.8 percent on Friday as the fragility of the U.S. economic recovery was highlighted by economic reports that showed U.S. consumers cut spending in September and consumer sentiment turned gloomier this month.
The yen rose to two-week highs against the dollar around 89.20 yen in early Asia trade, but the dollar had clawed back to 90.10 yen by midafternoon. Investors fret about a stronger yen as it eats into exporters' profits when they are repatriated.
Among exporters, Kyocera Corp sank 4 percent to 7,440 yen and Canon Inc lost 3.4 percent to 3,420 yen. Honda Motor Co slid 2.6 percent to 2,805 yen.
But Japanese consumer lender Aiful soared 15.8 percent to 154 yen, while rival Takefuji surged 23.1 percent to 427 yen. Consumer credit firm Credit Saison Co Ltd jumped 17.4 percent to 1,223 yen.
Sony slid 5.6 percent to 2,630 yen, with analysts saying the absence of any strong positive surprises in its earnings announcement on Friday had prompted profit-taking. (Editing by Edwina Gibbs)