(Updates with closing prices)

By Kevin Buckland

TOKYO, May 15 (Reuters) - Japan's Nikkei share average

dropped for a second day on Thursday, extending its retreat from

a nearly three-month peak, as a stronger yen sent automaker

shares sliding.

The Nikkei sank 1% to 37,755.51 as of the close, as

the yen strengthened for a third day, eroding the value of

Japanese exporters' overseas revenues.

The broader Topix fell 0.9%, also a second

session of losses.

The Nikkei had rallied 25% between a low on April 7 and the

high on Tuesday, partly as optimism built for a spate of U.S.

trade deals that would remove the risk of a global recession.

"The run-up in the Nikkei had been very fast, and we're

still at a very high level," said Maki Sawada, a strategist at

Nomura.

"Investors are cautious that there is still a degree of

overheating in the market."

Transport equipment was the worst performer among

the Tokyo Stock Exchange's industry groupings, dropping 2.8%.

Toyota ( TM ) tumbled 3.4%, while Honda ( HMC ) and

Nissan ( NSANF ) each slumped 3.9%.

Overnight news that U.S. and South Korean officials met last

week to discuss the exchange rate ignited speculation that

Washington may seek a weaker exchange rate for the dollar as

part of trade negotiations with Asian nations.

The Korean won surged as a result, pulling the

yen along in its wake.

Electronics exporters were also weak, with Sony ( SONY )

losing 2.8% and Nintendo ( NTDOF ) slipping 2.2%.

Uniqlo owner Fast Retailing ( FRCOF ) fell 1.5% to be the

biggest points drag on the Nikkei due to its heavy weighting.

Of the Nikkei's 225 components, 147 fell and 76 rose, with

two flat.

Shipping was a bright spot, jumping 2.4% to be

far and away the best performing TSE industry group, as a thaw

in Sino-U.S. trade relations boosted the outlook for cargo

traffic.