* Nikkei erases morning gains, turns negative
* Traders extend losses as oil falls further
* GS Yuasa slides after brokerage downgrade
TOKYO, June 29 (Reuters) - Japan's Nikkei average fell 0.9 percent on Monday, erasing morning gains as trading houses such as Mitsubishi Corp fell on lower oil prices and Daiwa Securities Group tumbled after announcing a $2.5 billion share sale. GS Yuasa Corp slid 9.5 percent to 852 yen after Goldman Sachs initiated coverage on the car battery maker with a "sell" rating and 700 yen target price, saying it expects strong growth expectations to subside.
The Nikkei's retreat came despite Japanese industrial output jumping 5.9 percent in May, matching April's biggest gain in half a century but less than a 7.0 percent rise forecast by analysts polled by Reuters, although the outlook remains murky with the effects of government stimulus expected to wear off. "The figures in some ways were a little less than expected overall, and blue-chip shares are strangely weak," said Hiroaki Osakabe, a fund manager with Chibagin Asset Management.
The benchmark Nikkei shed 99.37 points to 9,778.02, while the broader Topix lost 1.2 percent to 915.66.
"Economists had produced forecasts that were too strong for May and beyond because of a jump in April data," said Chotaro Morita, chief fixed-income strategist at Barclays Capital.
The Nikkei has taken a breather from a three-month rally that buoyed it to an eight-month intraday high of 10,170.82 earlier in June but is still on track for its best quarter since 1995, having risen around 22 percent so far in the April-June quarter.
With investors looking ahead to the Bank of Japan's quarterly "tankan" survey of business sentiment on Wednesday, trade was thin and centred more on individual shares than broader sectors, though resource shares took a battering as crude oil prices fell.
Oil fell towards $68 a barrel as easing of tensions in energy-rich Nigeria prompted some investors to take profits, with U.S. crude for August delivery down 35 cents at $68.81.
Mitsubishi Corp lost 3.2 percent to 1,755 yen, Mitsui & Co lost 3.9 percent to 1,116 yen and Itochu Corp lost 2.4 percent to 651 yen.
Daiwa Securities slid 12.7 percent to 583 yen after saying on Friday it would raise about $2.5 billion in its first share sale in 20 years as it looks to expand overseas and bolster its domestic retail operations.
Takeda Pharmaceutical fell 2.1 percent to 3,710 yen after Japan's largest drugmaker said its key diabetes drug had failed to get approval from U.S. regulators.
U.S. approval for the drug candidate alogliptin, which has been positioned by Takeda as a successor to its top-selling drug Actos, may take until the end of the business year to March 2012, Takeda told Reuters over the weekend. (Reporting by Elaine Lies; Editing by Michael Watson)