Japan's Nikkei average lost 3 percent by midafternoon on Friday after earlier touching a two-month low as Sony Corp's (6758.T) warning of massive losses fanned fears about corporate earnings amid more gloomy economic news at home and abroad. Steel makers fell on news that Nippon Steel Corp (5401.T) will more than double planned output cuts for the October-March period as demand crumbles, while chip gear makers sank after orders plunged in December. [ID:nT35301] [ID:nTKB003267] "There's a lot of concern out there about company earnings after Sony," said Katsuhiko Kodama, a senior strategist at Toyo Securities, noting that Japanese earnings are set to reach their peak next week. "Currency is a worry as well, since the stronger the yen gets the worse company results will be." The yen was not far from a 13-½ year high against the dollar and a seven-year peak against the euro hit earlier this week amid banking woes overseas. [USD/] But others said the impact of the Sony news alone was starting to wear thin and that investors were homing in on the poor economic conditions in both Japan and the United States. "There's still no real sense of when (U.S. President Barack) Obama's economic policies will actually be enacted, and this vagueness about the course of the U.S. economy has investors worried," said Hideyuki Ishiguro, a supervisor in the investment advisory section of Okasan Securities. "I wouldn't term the Sony news a 'Sony shock'. Actually, I think this might be a rather good chance to buy." The benchmark Nikkei .N225 was down 243.95 points at 7,801.79 after hitting a two-month low of 7,789.72 and on track for its third consecutive negative week, a streak not seen in nearly four months. The broader Topix lost 2.3 percent to 777.63. In the United States, data released on Thursday showed housing starts sank 15.5 percent to a seasonally adjusted annual rate of 550,000 units, the lowest on record, and initial weekly claims for jobless benefits rose to a seasonally adjusted 589,000. [.N] Also on Thursday, the Bank of Japan cut its economic growth forecast, predicting the world's No.2 economy would contract for two full years through March 2010. It said the economy would likely shrink 1.8 percent in the current fiscal year to March and contract 2.0 percent the following year, down from its previous forecasts of growth of 0.1 and 0.6 percent, respectively. [ID:nT17935] Sony shares lost 6.7 percent to 1,808 yen after it warned it would post a record $2.9 billion annual loss on sliding demand and a stronger yen. [ID:nT20158] Shares of chip equipment makers fell after orders for Japanese equipment used to make semiconductors tumbled 83 percent in December from the same month last year as chip makers kept spending at a bare minimum. Advantest Corp (6857.T), the world's top maker of chip testers, slid 2.2 percent to 1,191 yen and Tokyo Electron Ltd (8035.T) dropped 7.5 percent to 3,090 yen. Nippon Steel Corp, the world's second-biggest steelmaker, slid 5.4 percent to 264 yen. Rival JFE Steel Co, the core unit of JFE Holdings Inc (5411.T), has already announced output cuts. JFE Holdings lost 7.3 percent to 2,165 yen. (Reporting by Elaine Lies; Editing by Michael Watson)

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