(Updates with closing levels)

By Brigid Riley

TOKYO, April 17 (Reuters) - Japan's Nikkei share average

dropped for a third straight day on Wednesday to end below

38,000 points for the first time in two months as tensions in

the Middle East weighed on sentiment and investors took profit

before the earnings season heats up.

The Nikkei finished down 1.3% at 37,961.80, its

lowest closing level since Feb. 14, and was on track for its

biggest weekly loss since December 2022.

The broader Topix declined 1.3% to 2663.15.

The benchmark index opened higher but failed to hold on to

its gains as caution reigned, like it has through the week, due

to the uncertainty over how the situation in the Middle East

will unfold.

At the same time, investors appeared to be trading carefully

as Japan's earning season kicks into gear, analysts said, with

key companies such as chip-testing equipment maker Advantest ( ADTTF )

due to report next week.

"We see some market weakness this season" as companies

publish guidance for the new fiscal year, leading to some

profit-taking ahead of earnings, said Kenji Abe, an analyst at

Daiwa Securities.

U.S. stocks were mixed overnight as Treasury yields

continued to climb, giving the Nikkei little support.

Federal Reserve Chair Jerome Powell said on Tuesday that

monetary policy needs to be restrictive for longer, further

dashing hopes of significant interest rate cuts this year.

The Nikkei bled deep, with only 32 of its 225 constituents

climbing, while chip-related companies led the declines.

Advantest ( ADTTF ) slid 4.5%, while Lasertec ( LSRCF ) slumped 7.9%

and Tokyo Electron ( TOELF ) fell 1% to become the biggest

laggards on the index.

Fanuc Corp ( FANUF ), which makes factory automation

machinery, fell 3.3%, while AI-focused startup investor SoftBank

Group declined 1.3%.

The few gainers included Resonac Holdings ( SHWDF ), which

jumped 12% after the chemical company raised its revenue

forecast for 2024.