* Nikkei drops 0.3 pct as yen hits 3-week high vs dlr
* Exporters, precision machinery makers drop on stronger yen
* Daikin slides on report it wants to buy Goodman
* Advantest up 3.7 pct on news of buyout offer for Verigy
TOKYO, Dec 7 (Reuters) - Japan's Nikkei average ended 0.3 percent lower on Tuesday after renewed yen strength encouraged profit-taking but market players said underlying sentiment that took the benchmark to six-month highs last week remained bullish.
M&A news saw airconditioner maker Daikin slide 3.8 percent after Bloomberg news said it was in talks to buy U.S. rival Goodman Global Group in a deal that could be worth more than $3.6 billion.
But chip equipment maker Advantest jumped 3.7 percent after it made a $729 million buyout offer for U.S. rival Verigy Ltd.
"The yen's firmness is putting pressure on the Nikkei. Shares of precision machinery shares are especially under pressure due to the yen's strength on the euro," said Hiroaki Kuramochi, chief equity marketing officer at Tokai Tokyo Securities.
"So far we are not overly worried about the yen's recent recovery, but we'll be more concerned should the yen approach 80 (against the dollar)," said Kuramochi.
The Nikkei closed the day down 26.13 points at 10,141.10. The broader Topix index also shed 0.3 percent to 879.10.
The official China Securities Journal reported in a frontpage story that China's central bank may tighten credit which weighed on Chinese shares and in turn Tokyo equities in early trade.
But both markets later appeared to have shrugged off those concerns in a sign that investors were getting used to the idea that China may raise rates.
Investors were also hesitant about taking large positions in the Nikkei ahead of the closely watched settlement of futures and options prices on Friday.
The settlement, known in Japan as the special quotation or "SQ", is calculated from the opening prices of the 225 shares on the Nikkei average on the second Friday of the month.
Many investors appeared to have finished rolling over their positions to the March contract, a Tokyo-based options trader said, adding that he expects contracts expiring in December will settle around 10,050-10,300. (Reporting by Antoni Slodkowski; Editing by Edwina Gibbs)