TOKYO, July 31 (Reuters) - Japan's Nikkei share average

fell nearly 1% on Wednesday, while bank stocks rallied following

local media reports that the Bank of Japan was mulling an

imminent interest rate hike.

The Nikkei was down 0.9% at 38,186.48, as of 0055

GMT, while the broader Topix lost 0.5%.

The Tokyo Stock Exchange's banking index,

however, climbed nearly 2% to be the top performer among the 33

industry groupings. Higher rates would improve lending margins

and potentially boost investment income for banks.

The Bank of Japan is considering raising the key rate to

around 0.25% from near zero currently at its policy meeting that

ends later in the day, media including national broadcaster NHK

and the Nikkei newspaper reported overnight.

That sent the yen soaring about 0.8% against the dollar

on Tuesday, reducing the value of overseas sales at

Japan's many exporters.

BOJ policy announcements do not have a fixed time, but

generally come some time between 0230 GMT and 0500 GMT.

"If there actually is a rate hike today, the yen should

strengthen further and the Nikkei should fall further," said

Maki Sawada, an equity strategist at Nomura Securities.

"Hints about the pace of additional rate hikes will also be

key."

Speculation had already risen that the central bank might

raise rates again at the current meeting after several

high-profile Japanese politicians - including the prime minister

- urged a near-term normalisation of monetary policy.

The BOJ's last rate increase, in March, was its first since

2007.

Resona Holdings ( RSNHF ) was the Nikkei's best performing

bank with a 2.6% jump while Sumitomo Mitsui Trust Holdings ( CMTDF )

added 2.2%.

Japanese lenders have attracted larger foreign investment

flows than other sectors, as investors see them as top

beneficiaries of potential monetary tightening.

Banks lured an estimated 472 billion yen ($3.1 billion) of

net stock purchases in the year to July 25, according to J.P.

Morgan quantitative strategy team. That's more than double the

flows into the automobiles and components sector, another top

performer.

Shares of automakers slumped on Wednesday, with Toyota Motor ( TM )

dropping 2.6%.

Chip-sector stocks also declined, tracking a sell-off in

their U.S. peers overnight.

Chip-making equipment giant Tokyo Electron ( TOELF ) lost

1.6%. Artificial intelligence-focused startup investor SoftBank

Group tumbled 3.4%.

Of the Nikkei's 225 components, 160 declined versus 63 that

rose, with two being flat.

($1 = 152.2400 yen)