* Oil shares such as Japex underperform
* Sharp rises after report govt-backed fund invested 200 bln yen
By Ayai Tomisawa
TOKYO, Jan 12 (Reuters) - Japan's Nikkei share average fell to a 3-1/2-month low on Tuesday as tumbling oil prices spooked investors, dragging down the broader market.
Investors in Japan returned to the market after a holiday on Monday to find oil prices were still crumbling and Chinese stocks were struggling after closing on Monday at their lowest since September.
The Nikkei dropped 1.9 percent to 17,369.19 points by midmorning, after falling to as low as 17,357.61 earlier, the lowest level since Sept. 30.
Analysts said that investors are increasingly risk averse, raising chances that the safe-haven yen will strengthen and drag down Japanese stocks further.
"The Japanese market will likely stay unstable for a while," said Yutaka Miura, a senior technical analyst at Mizuho Securities. "There are a lot of concerns in the market, but the two main things investors in Japan are concerned about now are a rising yen and continuous falls in U.S. shares."
All of the Topix's 33 subsectors were in negative territory, with oil shares underperforming sharply. Inpex Corp stumbled 4.3 percent and Japan Petroleum Exploration Co tumbled 5.6 percent.
Financial shares also took a hit on dampened sentiment, with Mitsubishi UFJ Financial Group shed 2.5 percent and Sumitomo Mitsui Financial Group dropped 2.0 percent.
Retail company Aeon Co stumbled 9.6 percent after reporting a net loss in its March-November results.
Bucking the weakness, Sharp Corp rose 2.6 percent after saying it is in talks with various companies about its LCD business, though no decisions have been made. The comment followed a Nikkei report on Monday that Japanese government-backed fund has offered to invest 200 billion yen to help bail out the company.
The broader Topix dropped 1.6 percent to 1,423.97.
The JPX-Nikkei Index 400 shed 1.7 percent to 12,809.07. (Editing by Kim Coghill)