By Elaine Lies

TOKYO, Feb 4 (Reuters) - Japan's Nikkei average lost 0.5 percent on Thursday, with Toyota Motor Corp sliding further on its recall woes and Sharp Corp tumbling after reporting a smaller-than-expected quarterly profit.

But Honda Motor Co climbed after it lifted annual guidance far above expectations.

Shares of Toyota, which reported third-quarter results after the bell, ended down some 3 percent and at one point had lost a quarter of their value since a recent high on Jan. 21, as the U.S. government stepped up pressure on the company to address a range of safety issues.

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

'Toyota and Toyota group companies are weighing on the market,' said Takashi Ushio, head of the investment strategy division at Marusan Securities.

'There have certainly been a lot of good earnings overall, and more upward forecast revisions than expected, but while this is supporting the market it's not enough to push it higher ahead of U.S. jobs data and amid current doubts about whether world stock markets have finished with their downward adjustment.'

The benchmark Nikkei pared its losses to close down 48.35 points at 10,355.98 after earlier falling as much as 1.2 percent, while the broader Topix lost 0.5 percent to 911.09, also off earlier lows.

'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.

Other Japanese companies that reported results included Sony Corp, Hitachi Ltd and Nikon Corp.

TOYOTA TROUBLES

Analysts said that while the Toyota issue appeared to be taking on a political tone in the United States, it was not as strong as that of the anti-Japan sentiment of the 1980s.

'It's different from 25 years ago, when the USTR was making a fuss and people were smashing Japanese cars with huge hammers,' said Masayoshi Okamoto, head of dealing at Jujiya Securities.

'It's not that people hate Japanese cars or a trade imbalance, it's because there's a real problem.'

Denso Corp, the world's biggest listed auto parts supplier and an affiliate of Toyota, tumbled 6.3 percent to 2,532 yen, despite Denso tripling its annual operating profit forecast the previous day.

Other suppliers belonging to the Toyota group fell, with Aisin Seiki Co dropping 3.8 percent to 2,285 yen and Toyota Auto Body Co, a car assembler, shedding 1.1 percent to 1,558 yen.

Sharp Corp dropped 5.5 percent to 1,070 yen after reporting a smaller-than-expected quarterly profit, reflecting start-up costs at its new display panel plant.

But Honda closed up 2.6 percent at 3,220 yen, although it was off earlier highs.

Funai Electric Co Ltd fell by its daily limit of 700 yen to 4,005 yen, dropping 14.9 percent, after JP Morgan cut its rating on the TV maker to 'neutral' from 'overweight'.

October-December results were weaker than expected and a rise in panel prices may slow profit growth in the April-September first half of next business year, analyst Yoshiharu Izumi wrote in a note to investors, lowering his price target on Funai to 4,800 yen from 5,800 yen.

Funai earned a quarterly operating profit of 1.48 billion yen, missing JP Morgan's prior estimate of 3.4 billion yen, he wrote.

Some 2.2 billion shares changed hands on the Tokyo exchange's first section, with advancing shares outnumbered declining ones 816 to 710.

(Additional reporting by Aiko Hayashi; Editing by Michael Watson) ((elaine.lies@thomsonreuters.com; +81 3 6441 1807; Reuters Messaging:elaine.lies.reuters.com@reuters.net))

Keywords: MARKETS JAPAN STOCKS

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