Japan's Nikkei stock average fell 1.2 percent on Friday, with Canon Inc and other exporters hit by a stronger yen as worries about U.S. debt levels grew after a credit agency warned Britain's rating could be cut.

Standard & Poor's said there was a 1 in 3 chance the U.K. risks losing its precious triple-A credit rating because of the danger government debt may soar close to 100 percent of GDP, adding that Britain's outlook was negative and no longer stable.

The move raised fears that the United States, with its increasing budget deficit and weakened economy, could face the same situation, sending the dollar and Wall Street lower.

Markets all around the world appear to be looking for direction, and any chance of a U.S. downgrade would really hit U.S. assets such as the dollar and stocks, said Masayoshi Okamoto, head of dealing at Jujiya Securities.

The dollar was down 0.3 percent against the yen at 94.10 yen after earlier falling as low as 93.86 yen on electronic trading platform EBS.

For Japan, this situation comes just after earnings have come out and companies have set their currency rates, many of them at 95 yen. The chance of any further yen rise really paints a gloomy picture, Okamoto added.

Investors fret about a stronger yen because it eats into exporter profits when repatriated. Other analysts said that while the direct impact of the news on Japanese shares would be limited, it comes at a time when the market is vulnerable. We're in a period now where there aren't too many factors to trade on -- earnings are over and no economic packages are due out, so investors are likely to seize on this news, said Yoku Ihara, manager at the investment information department of Retela Crea Securities.

The benchmark Nikkei shed 109.35 points to 9,154.80 while the broader Topix lost 1.3 percent to 870.34.

Support for the Nikkei was expected from the 25-day moving average at around 9,000.

Canon slid 3.1 percent to 3,130 yen and Toyota Motor Corp lost 2.5 percent to 3,560 yen. Honda Motor Co fell 1.1 percent to 2,615 yen.

Tech shares suffered after their U.S. peers, one of the sectors often hit by signs of a sluggish economy, lost ground.

Advantest Corp lost 2.8 percent to 1,610 yen and TDK Corp shed 0.1 percent to 4,230 yen.

Shares of trading house Sumitomo Corp fell 1.9 percent to 936 yen after the company said it had put on hold its plans to build and operate a $6 billion power and water desalination plant in Saudi Arabia.

Defensive shares, including food companies such as Nippon Meat Packers, were among the few bright spots.

Manufacturers of medical masks and the cloth used to make them extended gains as the number of H1N1 flu cases increased in Japan, with Unitika up 1.1 percent to 94 yen and Shikibo climbing 1.6 percent to 193 yen.

(Reporting by Elaine Lies; Editing by Joseph Radford)

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