By Aiko Hayashi

TOKYO, Feb 4 (Reuters) - Japan's Nikkei average fell 0.6 percent on Thursday, weighed down by a slide in Toyota Motor Corp as its recall woes dragged on, though Honda Motor Co climbed after it lifted annual guidance far above market expectations.

Sharp Corp dropped 5.4 percent after reporting a smaller-than-expected quarterly profit, reflecting start-up costs at its new display panel plant.

In the latest development in Toyota's huge U.S. recall, the Obama administration stepped up pressure on the company on Wednesday to address a range of safety issues as investors bolted at signs of a deepening crisis for the world's largest automaker.

U.S. Transportation Secretary Ray LaHood also advised owners of recalled vehicles to stop driving their cars, before characterising the remark as a misstatement.

'Selling is dominating, with good earnings running their course after expectations for those results already buoyed the Nikkei to near 11,000 earlier this year,' said Hiroaki Kuramochi, chief equity marketing officer at Tokai Tokyo Securities.

'But companies reporting surprising results such as Honda are an exception. Some investors appear to be engaged in arbitrage trade, selling Toyota and buying Honda. Toyota's problems will likely deeply impact its outlook and something like 'Toyota bashing' emerging in America will also have a lasting impact.'

The benchmark Nikkei fell 60.07 points to 10,344.26, after rising 0.3 percent the previous day.

The broader Topix retreated 0.8 percent to 908.83.

Toyota fell 3.5 percent to 3,280 yen, extending losses as its unprecedented recall of millions of vehicles with faulty accelerators takes a toll on sales and may force the automaker to cut it 2010 sales forecasts.

Toyota reports its third-quarter earnings later in the day.

Shares of Honda advanced 2.2 percent to 3,210 yen after it lifted annual guidance far above market expectations, with cost cuts driving a jump in quarterly profit, and said it anticipates further growth next financial year.

Sharp declined to 1,071 yen, even though it forecast tight LCD supply for 2010, raising hopes for a further earnings recovery.

Other Japanese companies set to report results later in the day include Sony Corp, Hitachi Ltd and Nikon Corp.

(Editing by Hugh Lawson)

((aiko.hayashi@thomsonreuters.com; Reuters Messaging: aiko.hayashi.reuters.com@reuters.net; +81 3 6441 1802))

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