Jan. 21 (Bloomberg) -- Japanese stocks fell to a two-year low on concern the world's two largest economies are slowing.

Mitsubishi UFJ Financial Group Inc. led banks lower after Japan's Finance Ministry cut its evaluation of five of 11 regional economies as housing investment fell and employment worsened. Mitsubishi Estate Co. dropped after a report showed condominiums for sale in the Tokyo area declined 20 percent last month.

Toyota Motor Corp. and Honda Motor Co. slipped as an economic plan from President George W. Bush failed to ease speculation the U.S. will enter a recession. Millea Holdings Inc. dropped after Bank of America Corp. lowered its ratings on bond insurers.

``The Japanese economy has been weakening and a lot of economists had been overly optimistic,'' said Soichiro Monji, who helps oversee $47 billion at Daiwa SB Investments Ltd. in Tokyo. ``The negative news is reminding investors of the instability of U.S. financial institutions and the economy.''

The Nikkei 225 Stock Average slumped 535.35, or 3.9 percent, to 13,325.94 at the close in Tokyo, the lowest since Oct. 25, 2005. The broader Topix index lost 47.76, or 3.6 percent, to 1,293.74 as all of its 33 industry groups declined, closing below 1,300 for the first time since Sept. 9, 2005.

Mitsubishi UFJ Financial, Japan's largest bank by market value, fell 60 yen, or 6.2 percent, to 915. Sumitomo Mitsui Financial Group Inc. lost 42,000 yen, or 5.2 percent, to 759,000.

`Sluggishness'

The finance ministry added the expression of ``sluggishness'' to its description of the regions for the first time since the fourth quarter of 2004, when a slump in production caused the economy to shrink. Conditions have worsened in the economies of Tohoku, Kinki, Kyushu, Fukuoka and Okinawa, today's report said.

The Bank of Japan last week cut its evaluation in four of nine regions. The world's second-largest economy will keep losing steam for the time being, central bank Governor Toshihiko Fukui told branch managers at a meeting in Tokyo last week.

The Real Estate Economic Research Institute said sales of condominiums in Tokyo and the surrounding area fell 20 percent in December from a year earlier, declining for a fourth month.

Mitsubishi Estate, Japan's biggest developer, lost 100 yen, or 3.9 percent, to 2,445. Mitsui Fudosan Co., the second-biggest by value, slipped 90 yen, or 4 percent, to 2,165.

Toyota, Japan's biggest automaker, declined 180 yen, or 3.3 percent, to 5,260. Honda, the No. 2, fell 130 yen, or 4 percent, to 3,100. Matsushita Electric Industrial Co., the world's No. 1 maker of consumer electronics, dropped 85 yen, or 4 percent, to 2,050.

U.S. Declines

In the U.S., the Standard & Poor's 500 Index fell 5.4 percent last week. Bush didn't offer specifics on a stimulus plan, saying he wants to reach an agreement with Congress. The administration is considering offering $800 tax rebates for individuals and $1,600 for households, people familiar with the discussions said.

Bush's economic plan ``doesn't appear enough to revive the U.S. economy,'' said Naoki Fujiwara, who helps oversee $3.2 billion as chief fund manager at Shinkin Asset Management Co. ``Concerns the U.S. economy may slow make the prospects for the world's economy more unclear, driving down share prices.''

Meanwhile, U.S. reports this week may show sales of existing homes fell in December and first-time jobless claims increased, according to economist estimates in Bloomberg surveys.

Bank of America downgraded MBIA Inc. and Ambac Financial Group Inc., or so-called monoline insurers, to ``neutral'' from ``overweight,'' citing slowing economic growth and rising potential for losses. Monoline insurers guarantee the principal and interest payments of bond or other securities.

Insurers Drop

``The downgrades of monoliners' ratings will spur confusion in the financial market as some companies that provide monoliners with insurance may have to pay out,'' said Hiroaki Osakabe, who helps oversee $365 million at Chiba-Gin Asset Management Co. in Tokyo. ``Banks, securities companies, and most of all insurance companies, will be affected.''

Millea Holdings, the Japan's biggest insurer, dropped 180 yen, or 4.8 percent, to 3,570. Nomura Holdings Inc., the nation's largest investment bank, lost 57 yen, or 3.7 percent, to 1,473 yen, while Nikko Cordial Corp., which will withdraw its shares from Tokyo Stock Exchange trading on Jan. 23, slumped 85 yen, or 5.3 percent, to 1,521.

Elsewhere, Shinsei Bank Ltd., Japan's seventh-largest publicly traded lender by assets, added 9 yen, or 2.3 percent, to 406 yen. A group of investors led by U.S. buyout firm J.C. Flowers & Co. LLC offered to pay 202 billion yen ($1.9 billion) to buy 23 percent of the bank, Shinsei said on Jan. 18.

Dentsu Inc., the nation's biggest advertising company, tumbled 23,000 yen, or 8.6 percent, to 244,000 after Merrill Lynch & Co. cut its rating on the company's stock to ``neutral'' from ``buy.''

Nikkei futures dropped 3.3 percent to 13,340 in Osaka and fell 3.2 percent to 13,345 in Singapore.

To contact the reporter for this story: Masaki Kondo in Tokyo at mkondo3@bloomberg.net; Chen Shiyin in Tokyo at schen37@bloomberg.net.

Last Updated: January 21, 2008 01:31 EST