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* Japan investors wary of further heavy losses in China shares
* Sharp falls on earnings loss concern
* Renesas jumps after report government-backed fund may sell its stake to Sony
By Ayai Tomisawa
TOKYO, Jan 6 (Reuters) - Japan's Nikkei share average fell for a third day on Wednesday as worries about China's volatile markets continued to rattle investors' nerves, while Apple suppliers tumbled after a report that it may cut production of its latest iPhone models.
The Nikkei business daily said Apple Inc is expected to cut production of its latest iPhone models by about 30 percent in the January-March quarter.
It also said that inventories of the iPhone 6s and 6s Plus have piled up since they were launched last September.
Murata Manufacturing Co dropped 2.8 percent, TDK Corp stumbled 3.7 percent, while Alps Electric Co dived 6 percent.
The Nikkei dropped 0.5 percent to 18,274.79 in midmorning trade after traversing positive and negative territory. It has fallen to as low as 18,234.73 earlier, a fresh 2 1/2-month low.
Traders warn that investors be prepared for more market volatility in the weeks ahead. After a sharp drop in Chinese shares Monday, a new "circuit breaker" mechanism was introduced, suspending trade nation-wide for the first time.
The People's Bank of China poured nearly $20 billion into money markets, while the China Securities Regulatory Commission announced it was planning new rules to further restrict share sales by major stakeholders in listed companies.
Hikaru Sato, a senior technical analyst at Daiwa Securities, said that these measures' effects are limited "to stop a slide in the stock market for a short-period of time" but said the measures are not seen as the ultimate solution to calm the market.
"Unless the (Chinese) government comes up with a measure to support its economy in the long term, investors will likely stay concerned," he said, adding that the Japanese market may also see another sell-off if Chinese shares are suspended again.
"Investors are likely to turn to Japanese equities and sell if that happens."
At the same time, analysts said that such dips may create buying opportunities for Japanese stocks.
"Ahead of a U.S. jobs data release this Friday, we may see some volatility in stocks and foreign currencies. But expectations for strong earnings for Japanese companies continue, so now may be a good time to buy (cheap) stocks," said Masayuki Kubota, chief strategist at Rakuten Securities.
Sharp Corp tumbled more than 5 percent after the Nikkei business daily reported that it is expected to book operating loss of at least 10 billion yen for the nine months through December 2015.
On the other hand, Renesas Electronics Corp surged more than 5 percent after Kyodo News reported that a government-backed fund may sell part of its stake in the microchip maker to Sony Corp.
The broader Topix shed 0.4 percent to 1,498.40 and the JPX-Nikkei Index 400 slid 0.4 percent to 13,493.77. (Editing by Kim Coghill)