(Adds details, comments from MUFG)
By David Dolan and Taro Fuse
TOKYO, Jan 16 (Reuters) - Shares of Japan's big banks fell sharply on Wednesday as investors feared a widening impact of the U.S. subprime crisis, with Mizuho (8411.T) hitting its lowest in more than three years after it agreed to pump $1.2 billion into struggling U.S. rival Merrill Lynch MER.N.
Large Japanese lenders such as Mizuho Financial Group and Mitsubishi UFJ Financial Group Inc (8306.T) have so far dodged the heavy losses that have hit the likes of Merrill and Citigroup (C.N), but they haven't escaped unscathed.
Top-ranked Mitsubishi UFJ likely lost as much as $470 million on subprime investments last year, a more than tenfold increase from its previous estimate, industry sources with direct knowledge of the matter said on Wednesday. [ID:nT371216]
"Investors are worried this is turning into a black hole," said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments. "Sentiment is bad because no one knows if there will be further losses."
Shares of Mizuho Financial, Japan's second-largest bank, fell 8.8 percent to 459,000 yen after earlier hitting their lowest since December 2004. MUFG fell 4.7 percent to 952 yen, the lowest since November.
Mizuho agreed earlier this week to buy Merrill Lynch convertible preferred shares as part of the U.S. firm's $6.6 billion fundraising. Spurred by huge mortgage market losses, the world's largest broker has so far announced plans to raise $12.8 billion from outside investors.
Some Tokyo market participants likened Mizuho's purchase of a Merrill stake to further investment in the subprime market.
"Mizuho has subprime problems of its own. I think the money would be better spent shoring up its own capital base," said Takahiko Murai, general manager of equities at Nozomi Securities.
Still, the deals represent the growing importance of Asian financial institutions in bailing out top Wall Street firms.
The Merrill deal, the first big investment in a Wall Street bank by a Japanese lender since 1989, also marks a turnaround for Japan's banks.
Just a few years ago, Japanese lenders were on the verge of collapse and needed an injection of public funds. They have since cleaned up their balance sheets, boosted earnings and taken tentative steps towards once again expanding overseas.
Katsunori Nagayasu, the incoming president of Mitsubishi UFJ's core banking unit, told a news conference on Wednesday that overseas acquisitions or alliances would be neccessary to boost profitability.
"We will eventually have to take a non-organic (growth) strategy," Nagayasu said.
MUFG President Nobuo Kuroyanagi told the same briefing the bank would consider investing in a European or U.S. financial institution under the right opportunity. He declined to comment, however, on whether the bank's subprime losses had expanded to as much as 50 billion yen.
The bank likely suffered subprime losses of 50 billion yen in January-December, up from the 4 billion yen it previously reported for the six months to September, according to executives with direct knowledge of the matter, who spoke on the condition of anonymity because the information has yet to be announced.
In November, MUFG posted a near 50 percent drop in April-September profit, hit by subprime losses. At the time it also said subprime-related writedowns totalled 23 billion yen. (Editing by Ian Geoghegan)