Nov. 9 (Bloomberg) -- Japanese stocks dropped to the lowest level in three months after the Nikkei newspaper reported a merger between Shinko Securities Co. and a brokerage unit of Mizuho Financial Group Inc. will be delayed because of the latter's losses on subprime mortgage investments.

Mizuho led a rout in bank shares, sliding to the lowest in more than two years.

``There are no buyers out there for anything that's related to subprime,'' said Masahiko Nakatani, who helps manage $655 million at STB Asset Management Co. in Tokyo. ``It wouldn't surprise me if Japanese financial institutions come out with additional subprime-related losses.''

Matsushita Electric Industrial Co. led exporters lower after Federal Reserve Chairman Ben S. Bernanke said U.S. growth will probably ``slow noticeably,'' and inflation could accelerate.

The Nikkei 225 Stock Average fell 188.15, or 1.2 percent, to 15,583.42 at the close of trading in Tokyo. The broader Topix index lost 22.59, or 1.5 percent, to 1,494.35. Both measures dropped to the lowest since Aug. 17.

For the week, the Nikkei tumbled 5.7 percent and the Topix retreated 6.6 percent, the second-worst performances of the year for both gauges.

Commodities-related companies such as Mitsui & Co. gained after BHP Billiton Ltd. offered to buy Rio Tinto Group, boosting speculation takeovers in the industry will increase.

Mizuho Merger

Mizuho, the nation's second-largest publicly traded lender, tumbled 32,000 yen, or 5.7 percent, to 531,000. Sumitomo Mitsui Financial Group Inc., the third largest, fell 47,000, or 5.9 percent, to 750,000.

Mizuho Securities Co. may book a loss of more than 100 billion yen ($888 million) on investments in asset-backed securities tied to U.S. subprime mortgage loans, the Nikkei reported. The shortfall may cause the merger between Mizuho Securities and Shinko to be delayed, the newspaper said.

``We should be worried about all the financials,'' said Masafumi Oshiden, a fund manager in Tokyo at BlackRock Japan Co., whose parent company holds $1.1 trillion in assets.

Matsushita, the maker of Panasonic-brand products, fell 95 yen, or 4.3 percent, to 2,140. Nissan Motor Co., Japan's No. 3 automaker, slid 47 yen, or 3.8 percent, to 1,181. Hitachi Ltd., the world's biggest maker of hard-disk drives used in notebook computers, dropped 28 yen, or 3.7 percent, to 730.

Slowdown, Inflation

Bernanke said yesterday the U.S. economy will probably slow in the current quarter and there is a danger of the housing recession spilling over into consumer spending. The Fed chairman also noted there are risks to inflation due to soaring oil prices and the weak dollar. That may limit the central bank's ability to lower interest rates in the future.

``It's hard to have confidence in the earnings outlook for exporters for the next six months,'' said Naoki Fujiwara, who helps oversee $3.2 billion at Shinkin Asset Management Co. in Tokyo.

Shares also fell after the yen recently strengthened to 112.50 against the U.S. currency, after falling to 112.89 in morning trading. A stronger yen decreases the value of Japanese exporters' dollar-denominated sales when converted into local currency.

Mitsui & Co., Japan's second-largest trading company, gained 80 yen, or 3 percent, to 2,740. UBS AG boosted its recommendation on the shares to ``buy,'' citing a positive earnings outlook as commodities prices climb. Sumitomo Metal Mining Co., Japan's biggest nickel producer, jumped 75 yen, or 3.2 percent, to 2,405.

BHP's Rio Bid

BHP Billiton, the world's biggest mining company, yesterday offered to buy rival Rio Tinto Group for three shares to one in what could be the biggest acquisition in history. Rio rejected the offer, saying it was too low.

Generic drugmakers surged after advisers to the health ministry approved a plan to promote generics.

Sawai Pharmaceutical Co., the nation's biggest, soared 440 yen, or 13 percent, to 3,740. Towa Pharmaceutical Co., the second biggest, gained 350 yen, or 8.1 percent, to 4,690.

According to the proposal, doctors would have to specify in writing if a generic alternative cannot be used.

Non-generic pharmaceutical companies declined on concern their profits will be curbed. Takeda Pharmaceutical Co., Japan's largest, fell 220 yen, or 3.1 percent, to 6,840. Astellas Pharma Inc., the second biggest, dropped 190 yen, or 3.7 percent, to 4,890.

Nikon Corp. rallied 340 yen, or 10 percent, to 3,740, gaining the most since November 2002. The world's second-biggest maker of cameras for professionals said yesterday full-year profit and sales will beat targets because of demand for pricier models.

Nikkei futures expiring in December fell 1.2 percent to 15,550 in Osaka and declined 1.1 percent to 15,570 in Singapore.

The settlement price for Japan's Nikkei 225 options contracts for November delivery was set at 15,684.40, traders said. The settlement price, also known as the ``special quotation,'' of Nikkei 225 options is calculated after all stocks in the index begin trading.

Astellas Pharma Inc. (4503 JT)
Hitachi Ltd. (6501 JT)
Matsushita Electric Industrial Co. (6752 JT)
Mitsui & Co. (8031 JT)
Mizuho Financial Group Inc. (8411 JT)
Nikon Corp. (7731 JT)
Nissan Motor Co. (7201 JT)
Sawai Pharmaceutical Co. (4555 JT)
Shinko Securities Co. (8606 JT)
Sumitomo Metal Mining Co. (5713 JT)
Sumitomo Mitsui Financial Group Inc. (8316 JT)
Takeda Pharmaceutical Co. (4502 JT)
Towa Pharmaceutical Co. (4553 JT)

To contact the reporter for this story: Patrick Rial in Tokyo at prial@bloomberg.net; Satoshi Kawano in Tokyo at Skawano1@bloomberg.net.

Last Updated: November 9, 2007 02:33 EST