* Key index drops 14 points after reaching highest in 2 years
* Yen's strength, unclear outlook hurt sentiment in Sept
* Investors still nervous about new investment post-crisis
* 60 pct on sidelines, 37 pct have made new investments
By Chikafumi Hodo and Mari Terawaki
TOKYO, Sept 18 (Reuters) - Japanese retail investor sentiment towards domestic stocks slid in September from a month earlier, as a stronger yen increased concerns about the outlook for the nation's export-led economy, a Reuters survey showed on Friday.
Confidence was also hurt by the benchmark Nikkei average's struggle to extend gains from an 11-month high set in August.
Worries about the economy have been exacerbated as the yen appreciated nearly 3 percent against the dollar last month to around 92.5 yen. It has since climbed to a 7-month high of 90.12 yen against the dollar on trading platform EBS on Wednesday.
A strong Japanese currency eats into the value of earnings garnered abroad when they are repatriated.
"The yen is continuing to strengthen. It's worrying as the yen could appreciate beyond 90 yen to the dollar," said an investor in his 40s.
The survey's investor sentiment index fell 14 points to minus 24 in September after scoring the highest reading in two years the previous month.
The index is calculated by subtracting the percentage of investors who say they are bearish from those who are bullish.
While Japanese production and exports are showing signs of improvement, they are still weak given the unprecedented plunge in worldwide trade following the global financial crisis, and the service sector has been hurting as consumers rein in spending.
"Consumption continues to be weak. There are many uncertainties. We are also not sure how long the effect of a series of economic stimulus measures conducted by governments around the world will last," said a respondent in his 30s.
The survey, to which 734 people responded, was conducted Sept 7-10, when the Nikkei edged above 10,500, but it was off an 11-month intraday high of 10,767 hit on Aug. 31.
The survey also showed nearly 60 percent of respondents were still wary about making new investments in the wake of the global financial crisis triggered by the failure of Lehman Brothers a year ago. About 37 percent said they have made new investments.
"Fresh investments will have to wait for a while, until I have recovered all of my unrealised losses," said an investor in his 60s.
Looking one year ahead, around 40 percent of retail investors said they saw domestic stocks as the most promising asset class in which to invest. Some 22 percent said foreign equities were the most promising while 12 percent favoured gold and other commodities.
The monthly poll, which is conducted anonymously, aims to capture the view of readers of an online magazine aimed at users of the Reuters Japan Web site (http://www.reuters.co.jp) (Reporting by Chikafumi Hodo; Editing by Edwina Gibbs)