May 17 (Bloomberg) -- Japanese stocks fell after a government report showed deflation deepened more than some economists expected, tempering optimism that growth in the world's second- largest economy will be sustained. Property stocks such as Mitsui Fudosan Co. paced the drop.

``The most recent figures look quite strong, thanks to consumer and capital spending and we were able to confirm a domestic demand-led recovery,'' said Norihiro Fujito, a senior strategist at Mitsubishi Securities Co. in Tokyo. ``Still, the bigger-than-expected drop in the deflator figure is behind the muted gains.''

The Nikkei 225 Stock Average declined 45.94, or 0.4 percent, to 10,901.28 at 1:41 p.m. in Tokyo, after rising as much as 1.1 percent earlier. The Topix index lost 7.61, or 0.7 percent, to 1115.76.

Key indexes reversed early gains after the report also showed Japan's economy, the world's second largest, grew at more than twice the rate economists forecast.

Nikkei 225 futures for June delivery lost 0.5 percent to 10,900 in Osaka and slipped 0.3 percent to 10,900 in Singapore.

Some 778 billion yen ($7.3 billion) in shares included in the Topix traded, 38 percent less than the daily average for the past three months. Two shares fell for every one that gained on the Tokyo Stock Exchange's first section.

Growth Momentum

Sumitomo Realty, Japan's third-largest property developer, lost 28 yen, or 2.4 percent, to 1,161. Mizuho, Japan's biggest lender by assets, declined 7,000 yen, or 1.4 percent, to 487,000.

While key indexes reached the day's highs in the morning session following the GDP report, not all analysts and investors were bullish about the growth outlook as the report also showed seven years of deflation have taken a toll on the economy.

Prices as measured by the GDP deflator fell 1.2 percent from a year earlier, compared with the 0.7 percent drop predicted by economists.

``I'm not expecting the growth momentum to continue in the April-June and July-September quarters,'' said Seiichiro Iwasawa, Tokyo-based equity strategist at Nomura Securities Co., Japan's biggest brokerage. ``The biggest focus will be where U.S. stocks will head.''

The world's second-biggest economy expanded at an annual 5.3 percent pace, the Cabinet Office said in Tokyo. That exceeded the 2.4 percent median forecast in a Bloomberg News survey of 28 economists. Quarter-on-quarter, the economy grew 1.3 percent, more than the 0.6 percent forecast in the survey.

To contact the reporter for this story: Tomoko Yamazaki in Tokyo at tyamazaki@bloomberg.net.

Last Updated: May 17, 2005 00:44 EDT