By Chikako Mogi

TOKYO (Reuters) - Japanese stocks fell while the dollar held steady against the yen on Tuesday as market players awaited direction from U.S. and U.K. markets when they resume trade after holidays on Monday, following last week's turbulence.

The Nikkei stock average <.n225> opened down 1.4 percent, extending Monday's 3.2 percent plunge. The Nikkei average dropped 7.3 percent on Thursday, its largest single-day loss since the March 2011 earthquake and tsunami. <.t></.t></.n225>

"The very fragile market will continue because market participants are cautious over the uncertainty in the short term," said Takashi Hiroki, chief strategist at Monex Inc.

Equity, bond and currency markets were vexed last week by talk the U.S. Federal Reserve could scale back its aggressive monetary stimulus, kept in place for the past five years and underpinning global financial markets, sooner than had been expected.

The dollar was up 0.3 percent against the yen at 101.19 after falling to a two-week low of 100.66 yen on Friday, having hit a 4-1/2 year peak of 103.74 yen only a few days earlier on May 22. Traders expect the dollar to face downward pressure against the yen if Japanese stocks extend losses, but the U.S. currency will remain supported by improving fundamentals that would allow for the winding down of the Fed's aggressive stimulus.

"It is natural for markets to react to suggestions that there may be a change in the Fed's policy stance which had defined a trend in markets for the last five years, and try to assess the magnitude of the impact if the change really takes place," said Yuji Saito, director of foreign exchange at Credit Agricole in Tokyo.

Saito added that seasonal factors such as hedge funds closing their books in May and June have also exaggerated corrective moves as they hastened to adjust their positions.

"Markets are now seeking levels to stabilize, but players are likely to wait for cues from U.S. markets when they resume trade after Monday's holiday," he said.

MSCI's broadest index of Asia-Pacific shares outside Japan <.miapj0000pus> was steady, holding slightly above Friday's five-week low of 464.99. Australian shares <.axjo> were nearly flat and South Korean shares <.ks11> opened up 0.2 percent.</.ks11></.axjo></.miapj0000pus>

UK and U.S. holidays kept European equity and bond markets quieter than usual on Monday.

The eventual normalization of monetary policy in the United States, and almost certainly later in other major currency areas, is likely to be a dominant driver of asset markets over the next 3-5 years, but "while it is never too early to contemplate the effects of such a powerful change in the financial context, we think it is too early to position for it," Barclays Capital said in a research.

Fed Chairman Ben Bernanke said last week that a decision to scale back the $85 billion in bonds the Fed buys each month could be taken at one of the central bank's "next few meetings" if the economy looked set to maintain momentum.

Commodities were likely to face pressure from an uncertain demand outlook after data last week showed China's factory activity declined in May for the first time in seven months and U.S. manufacturing grew at its slowest pace since October.

U.S. crude futures were down 0.3 percent at $93.86 a barrel.

(Additional reporting by Dominic Lau in Tokyo; Editing by Eric Meijer)

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