* Nikkei posts biggest daily pct drop since mid-March
* Investors on sidelines amid growing tension ahead of July 6
* Defensive stocks underperform
* Sharp dives 7.8 pct after jumping 15 pct on Friday
By Ayai Tomisawa
TOKYO, July 2 (Reuters) - Japan’s Nikkei slid to 2-1/2-month lows on Monday, with the broader market dragged down by a slump in China’s stock market and as investors rushed to unwind long positions.
On the first trading day of July, the Nikkei dropped 2.2 percent to 21,811.93, the lowest closing price since April 13. It was the largest daily percentage drop since mid-March.
The market opened with a weaker note but selling accelerated in late trade after Shanghai shares erased their sharp gains from Friday.
“Event-driven funds which were seen chasing the market higher by buying futures on hopes for the success of the U.S.-North Korea summit and the U.S. Fed’s rate hike in June were seen unwinding their positions,” said Norihiro Fujito, chief investment strategist at Mitsubishi UFJ Morgan Stanley Securities.
Investor sentiment was hit earlier by the Bank of Japan’s closely watched quarterly “tankan” survey of Japanese big manufacturers’ business confidence, which worsened in June from three months ago.
The mood was also soured by trade worries after exit polls pointed to a decisive victory for Mexican presidential front-runner Andres Manuel Lopez Obrador’s party, who is expected to inject a dose of nationalism into government and sharpen divisions with U.S. President Donald Trump.
The United States, which has been at odds with Mexico and Canada over the renegotiation of the North American Free Trade Agreement (NAFTA), has launched a probe into whether to slap tariffs on imported autos. Results are expected within months.
“While trade tensions between the U.S. and China have roiled the market, there are worries that NAFTA’s framework will change,” Fujito said.
Analysts said that investors will likely stay on the sidelines this week amid growing tension ahead of a July 6 deadline when the United States is set to impose US$34 billion of tariffs on China’s exports.
The broader Topix dropped 2.1 percent to 1,695.29, with all of its 33 subsectors in negative territory.
Defensive stocks such as food, drug and retail stocks underperformed, with Kikkoman Corp stumbling 6.3 percent, Otsuka Holdings dropping 3.6 percent and Aeon declining 5.7 percent.
Exporters which gained in early trade lost ground. Advantest Corp shed 1.7 percent and Tokyo Electron dropped 1.5 percent.
Sharp Corp, which jumped 15 percent on Friday after it cancelled plans to issue up to $2 billion in new shares, dived 7.8 percent.
Editing by Jacqueline Wong