Oct. 6 (Bloomberg) -- Japanese stocks fell, with the Nikkei 225 Stock Average and the Topix index set for their biggest drop in more than five months.

Exporters such as Hitachi Ltd. and Honda Motor Co. led the drop after a report showed growth in the U.S. service industries expanded at the slowest pace in more than two years in September.

``No matter how strong Japan's domestic economy is, a slowdown in the U.S. is going to have an impact to some extent, such as on exports,'' said Hisakazu Amano, who helps oversee about $634 million at T&D Asset Management in Tokyo. ``That concern is starting to play a role in prompting people to sell.''

Energy-related shares including Inpex Corp. also tumbled after crude oil prices fell to a two-month low.

The Nikkei sank 296.05, or 2.2 percent, to 13,393.84 at the 11 a.m. lunch break in Tokyo. The Topix slipped 31.03, or 2.2 percent, to 1378.64, with all 33 industry groups declining. Both key indexes are set for their biggest drop since April 18.

Nikkei 225 futures for December delivery lost 2 percent to 13,390 in Osaka and slid 2 percent to 13,385 in Singapore.

Fuji Heavy Industries Ltd. was bid up by the exchange-imposed daily limit after General Motors Corp. said Toyota Motor Corp. agreed to buy part of its stake in the automaker.

In the U.S., the Institute for Supply Management's measure of financial services, retail trade and other non-manufacturing businesses fell to 53.3, the lowest since April 2003, from 65 in August. The decline was the biggest since the index, which covers 87 percent of the economy, was started in 1997.

The ISM report helped drive U.S. stocks to their broadest decline in more than 15 months, with the Standard & Poor's 500 Index dropping 1.5 percent.

`Harbinger'

Both the Nikkei and the Topix are falling after completing their best quarters in a decade in the three months ended Sept. 30 amid evidence that a pickup in economic growth at home will support earnings.

T&D Asset's Amano said he prefers domestic demand-related shares such as banks, insurers, steelmakers over exporters declining to name the companies.

``We're starting to see some impact from weakness in the U.S. and today is going to be the day where we test if Japan will manage to shrug that off,'' said Juichi Wako, strategist at Nomura Securities Co. in Tokyo. ``Whether technology shares will be able to limit declines will be the harbinger of where the market will go from here.''

A total of 1,437 stocks declined so far, the most since April 18, while 175 rose on the Tokyo Stock Exchange's first section. About 1.2 trillion yen ($10.5 billion) in shares included in the Topix traded, 29 percent less than the daily average for the past three months.

Exporters Drop

Hitachi, Japan's largest maker of electronics, slid 38 yen, or 5 percent, to 719. Honda, which is the most dependent on U.S. sales among Japan's top three carmakers, dropped 240 yen, or 3.6 percent, to 6,410. Canon Inc., the world's largest maker of copiers, dropped 270 yen, or 4.3 percent, to 6,050.

Among exporters, Nintendo Co., which introduced Super Mario and Donkey Kong computer games in 1981, fell 220 yen, or 1.6 percent, to 13,510 after Credit Suisse First Boston cut the stock to ``underperform'' from ``neutral' at Credit Suisse First Boston, citing sales data that suggests the company's latest player, Nintendo DS, is struggling in the U.S. market.

Oil Stocks Tumble

Inpex, Japan's largest oil explorer, slid 42,000 yen, or 5 percent, to 806,000. Teikoku Oil Ltd., which plans to spend 5.5 billion yen on oil exploration in Libya over five years, dropped 68 yen, or 5.9 percent, to 1,076.

Showa Shell Sekiyu K.K., the Japanese refining unit of Royal Dutch Shell Plc, tumbled 107 yen, or 7 percent, to 1,417.

Crude oil for November delivery fell 1.7 percent to $62.79 a barrel on the New York Mercantile Exchange, the lowest close since Aug. 5, after a government report showed that U.S. fuel demand dropped. It recently traded down 0.7 percent at $62.35 a barrel in after-hour trading.

Fuji Heavy, the maker of Subaru-brand vehicles, was poised to gain with buy orders exceeding sell offers. The stock was last bid by the daily exchange-imposed limit of 100 yen at 640 yen, up 19 percent from yesterday.

Goldman, Sachs & Co. and Merrill Lynch & Co. raised their ratings on the stock.

General Motors, raising cash after a first-half loss, agreed to sell its entire stake in Fuji Heavy with a market value of $746 million to Toyota and on the market.

Toyota, the world's second-largest carmaker after GM, will pay about $315 million in cash for 68 million shares, or 8.7 percent, of Fuji Heavy, GM said in a statement on PRN newswire. GM will sell 11.4 percent of Fuji Heavy on the market.

``Toyota can help GM, nice gesture, and also get capacity at a cheap price and maybe even new businesses like defense and airplane-related,'' said Edwin Merner, who oversees $600 million in assets as president of Atlantis Investment Research Corp. in Tokyo. ``Looks interesting and Fuji is not viable by themselves so everyone benefits, maybe.''

Toyota shares declined along with other exporters. The stock slipped 80 yen, or 1.5 percent, to 5,170,

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

Last Updated: October 5, 2005 22:23 EDT