* Worry about U.S. indicators this week weighs on market
* May test low at 8,800, then 8,697, a 61.8 pct retracement
* Pension funds may be buying at lows - analyst
By Elaine Lies
TOKYO, Aug 31 (Reuters) - Japan's Nikkei fell more than 2 percent on Tuesday, with profit-taking erasing a bounce the day before, as worries grew about the pace of U.S. economic recovery ahead of a week of indicators widely expected to be bad.
Market players also blamed disappointment after an emergency Bank of Japan meeting on Monday, at which the central bank expanded its fund supply tool to try and curb the rising yen, a move that many in the market said was insufficient.
"The BOJ at last did do something yesterday, but the move lacked conviction and has done little to change the trend towards one of a weaker yen," said Takashi Ushio, head of the investment strategy division at Marusan Securities.
"Though 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."
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.
The benchmark Nikkei shed 2.5 percent or 224.29 points to 8,926.81, while the broader Topix lost 1.9 percent to 813.40.
Though the Nikkei jumped more than 3 percent and nearly 300 yen on Monday prior to the BOJ decision, profit-taking ensued and it subsequently trimmed gains to end up by 1.8 percent.
Market players said the week was likely to be rocky, both at home and on Wall Street, with the markets primed for profit-taking after any rises.
Some light buying by pension funds was likely, but other investors, such as retail investors, were expected to stay on the sidelines, they said.
The dollar had edged down 0.1 percent against the yen to 84.53 yen, shrugging off the BOJ's move.
"What the BOJ did was pretty clearly ineffective. They need to do something targeted specifically at the currency market -- ultimately, probably intervention," said Kenichi Hirano, operating officer at Tachibana Securities.
Market players said the Nikkei could test the 8,800 level, around a 16-month low hit last week, sometime this week or early next week.
Below 8,800, the next target is 8,697, a 61.8 percent retracement of the rally between the Nikkei's March 2009 low and April 2010 high.
Shares of exporters lost ground on profit-taking, hurt by strength in the yen and after U.S. stocks fell.
Canon Inc dropped 2.9 percent to 3,480 yen and Kyocera Corp slid 2.7 percent to 7,240 yen. Sony Corp lost 2.6 percent to 2,395 yen.
Chip-linked firms tumbled after Intel Corp fell in the wake of its $1.4 billion bid to buy the wireless unit of German chipmaker Infineon Technologies Ag.
The Philadelphia Semiconductor Index lost 2.5 percent.
Chip-tester maker Advantest Corp lost 3.5 percent to 1,625 yen, Tokyo Electron shed 4.8 percent to 3,980 yen, and stepper maker Nikon Corp fell 2.8 percent to 1,411 yen. (Editing by Edwina Gibbs)