* 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
* Nikkei poised for worst monthly performance since May
By Elaine Lies
TOKYO, Aug 31 (Reuters) - Tokyo stocks slid 2.6 percent on Tuesday, erasing two days of gains after the Bank of Japan's emergency Monday move failed to curb strength in the yen and as worries about the U.S. economy spurred profit-taking.
Market players blamed disappointment after the BOJ expanded its fund supply tool, widely seen as an ineffective move but also said that with the U.S. economic recovery under a cloud, there were limits to how much Japan alone could do for its economy and stock market.
"The BOJ policy shift wasn't sufficient, that's clear. But this isn't just a Japanese issue, the weakening U.S. economy is a big problem," said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments.
"For Japanese stocks to really rise we need to see some kind of recovery in the U.S. economy, but of course that whole situation right now is very unclear."
The benchmark Nikkei shed 236.93 points to 8,912.33 and was poised for its worst month since May, while the broader Topix lost 2.1 percent to 811.80.
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 dollar edged down 0.3 percent against the yen to 84.33 yen, falling back down towards last week's 15-year low of 83.58 yen.
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.
"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."
Some light buying by pension funds was likely, but other investors, such as retail investors, were expected to stay on the sidelines, market players said.
Market players said the Nikkei could test the 8,800 level, around a 16-month low hit last week, sometime this 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.
LOSING GROUND
Along with Chinese stocks, the Nikkei is also one of the worst performers among major indexes in the world so far this year.
The Shanghai Composite Index has shed about 19 percent, while the Nikkei has lost around 15 percent and the Dow Jones industrial average is 4 percent lower.
Among sectors worst-hit this year are high-tech shares, vulnerable both to a strong yen and economic chills. The precision machinery subindex hast lost about 20 percent.
Chip-linked shares were also among the worst performers on Tuesday, hit by falls in their U.S. peers 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 3.7 percent to 1,621 yen, Tokyo Electron shed 4.9 percent to 3,975 yen, and stepper maker Nikon Corp fell 3 percent to 1,408 yen.
Other exporters fell as well.
Canon Inc dropped 3.2 percent to 3,470 yen and Kyocera Corp slid 2.6 percent to 7,250 yen. Sony Corp lost 3.2 percent to 2,379 yen.
But Itoki Corp rose 3 percent to 237 yen after the maker of office furniture after announcing a share buyback worth up to 1.9 percent of its outstanding shares. (Editing by Edwina Gibbs)