Mitsubishi UFJ Financial Group, Japan's biggest bank, warned on Friday that it now expects to have slid to an annual net loss of $2.7 billion, hit by losses on its stock holdings.

Japan's banks, like their overseas peers, are fighting to shore up their capital as financial markets shrink amid the global economic crisis, eroding their wealth and ability to invest.

Mitsubishi UFJ said it is likely to book a 260 billion yen loss for the year ended in March, compared with its most recent estimate of a 50 billion yen profit. Losses on its stock holdings were likely to total 520 billion yen.

It also cut its six-month dividend nearly 30 percent to 5 yen.

The annual net loss would be Mitsubishi UFJ's first since the bank was created in a merger in late 2005.

Smaller rivals Mizuho Financial Group and Sumitomo Mitsui Financial Group have already warned of annual net losses that together total 970 billion yen, also hurt by stock losses.

Unlike their Western rivals, Japanese banks take stakes in their corporate clients as a way to seal business ties. Together they held 25.6 trillion yen worth of shares at the end of March 2008, industry data showed.

The benchmark Nikkei share average fell 35 percent during the year to the end of March, implying a 9 trillion yen loss for the nation's banking industry.

Japan may consider tougher limits on the amount of shares banks can hold, the head of the country's financial regulator told Reuters this week.

Shares of Mitsubishi UFJ Financial finished 0.4 percent lower at 533 yen prior to the announcement.

($1=97.50 Yen)

(Reporting by David Dolan and Mayumi Negishi; Editing by Edwina Gibbs)

Japan