Japan's Nikkei falls as tech shares track Nasdaq lower

Updates with midday closing level

TOKYO, Jan 28 (Reuters) - Japan's Nikkei share average fell on Tuesday as heavyweight chip-related stocks tracked an overnight drop in the Nasdaq, but gains in bank shares helped the Topix reverse early losses.

The Nikkei .N225 ended the morning session down 0.57% at 39,340.15, after falling as much as 1.7% earlier in the session.

The broader Topix .TOPX was up 0.45% at 2,770.5.

The Nasdaq Composite Index .IXIC posted its biggest one-day percentage drop since Dec. 18 on Monday as a low-cost Chinese artificial intelligence model prompted a steep sell-off in U.S. chipmakers. .N

An index of U.S. semiconductor stocks .SOX dropped 9.2% in its biggest single-day percentage fall since March 2020 as Chinese startup DeepSeek rolled out a free assistant it says uses cheaper chips and less data.

Chip-testing equipment maker Advantest 6857.T, a supplier to Nvidia NVDA.O, dropped 9.6% to drag the Nikkei the most. Chip-making equipment maker Tokyo Electron 8035.T fell 3.78%. Technology start-up investor SoftBank Group 9984.T lost 4.71%.

"We think DeepSeek either builds on existing inference infrastructure or will itself stimulate new AI demand, for example, at the so-called Edge; in both cases, semiconductor intensity remains high," said Richard Kaye, portfolio manager at Comgest.

"The deep fall in semiconductor equipment stocks, Tokyo Electron, ASML ASML.AS, Applied Materials AMAT.O, is quite a mistake, therefore, in our view."

Bank shares rose on expectations for better outlook after the Bank of Japan (BOJ) raised its policy rate. Mitsubishi UFJ Financial Group 8306.T and Mitsui Sumitomo Financial Group 8316.T and Mizuho Financial Group 8411.T climbed 2.55%, 2.07% and 3.14%, respectively.

The Topix's banking index rose 2.16%.

The BOJ on Friday raised interest rates by 25 basis points to 0.5%, the highest since the 2008 global financial crisis, and revised up its inflation forecasts.

Of more than 1,600 shares trading on the Tokyo Stock Exchange's prime market, 72% of shares rose and 25% fell, with 2% flat.