* May test low at 8,800, then 61.8 pct retracement at 8,697
* Individual investors likely bailing out -analyst
* Nikkei poised for worst monthly performance since May
* Worry about this week's U.S. indicators weighs on market
TOKYO, Aug 31 (Reuters) - Tokyo stocks fell 3 percent on Tuesday, their worst daily drop in three months, after the Bank of Japan's emergency moves the day before failed to curb the yen's strength and disheartened investors bailed out of the market.
Market players noted disappointment after the BOJ expanded its fund supply tool, widely seen as an ineffective move, while the U.S. economic recovery was under a cloud, limiting how much Japan alone could do for its economy and stock market.
"The market appears to be demanding more steps from Japanese authorities after the BOJ measures were not strong enough to stop the yen from advancing," said Masayuki Otani, chief market analyst at Securities Japan Inc.
"The next step would have to be intervention, though first we may see one or two more verbal intervention attempts.
"Investors are also selling ahead of this week's U.S. economic indicators, including jobs data, because of worries that if those data are poor, that'd also prompt selling of the dollar. At this level, individual investors in particular are dumping shares, along with foreigners."
The benchmark Nikkei shed 277.40 points to 8,871.86 and was poised to record its worst month since May, while the broader Topix lost 2.6 percent to 807.46.
The dollar slipped 0.4 percent against the yen to 84.25 yen, within sight of last week's 15-year low of 83.58 yen.
U.S. stocks fell in the year's lightest volume on Monday as worries about the pace of recovery overshadowed a rise in consumer spending and incomes, with investors moving to the sidelines ahead of this week's data, including non-farm payrolls data on Friday.
"Although the U.S. spending data yesterday wasn't bad, it's the indicators out later this week that are the really important ones, and predictions for these are really raising fears about the economic recovery," said Takashi Ushio, head of the investment strategy division at Marusan Securities.
Some light buying by pension funds was likely and may offer support at the lows, but market players said the Nikkei could test the 8,800 level, around a 16-month low hit last week, at some point this week.
Below 8,800, the next target is 8,697, a 61.8 percent retracement of the Nikkei's rally from its March 2009 low to its April 2010 high.
Exporters took a beating. Canon Inc sank 3.9 percent to 3,445 yen and Kyocera Corp shed 3 percent to 7,220 yen. Sony Corp lost 3.5 percent to 2,373 yen. (Reporting by Aiko Hayashi; Editing by Edmund Klamann)