(Reuters) - Japan's Nikkei average fell on Thursday in profit-taking ahead of a futures settlement, as market participants fretted over key debt auctions in Europe and a European Central Bank meeting this week.    

The Nikkei dropped 0.7 percent to 8,385.59, below its 25-day moving average near 8,483 but above the 61.8 percent retracement level of its rally from late November to early December, near 8,363.    

The benchmark has no sense of direction and trading volumes remain thin. It's a depressing start to the trading year, said Yoshihiro Ito, chief strategist at Okasan Online Securities.    

The benchmark has largely kept to a narrow range of 8,350 to 8,500 since mid-December.    

Market players said investors sold shares ahead of a closely watched special quotation (SQ) settlement of January futures contracts.

The broader Topix index eased 0.9 percent to 727.15.    

Olympus, which is engulfed in a $1.7 billion accounting scandal, was among the top weighted gainers on the Nikkei, up 3.3 percent to 1,270 yen, after a report it was considering an equity tie-up with candidate companies includingSony Corp and Panasonic Corp.     

The camera and medical equipment maker said it was mulling various options for reform but nothing had been decided.    

Mobile social gaming firm Gree Inc shed 3.5 percent, taking its losses to 13 percent since a report on
Friday that Japan's consumer affairs agency may begin scrutinising internet games companies' fees. A Gree spokeswoman said there was no truth in the report.   

Gree has fallen nearly 17 percent since the start of the year after rallying 156.7 percent in 2011 compared to a 17 percent decline for the benchmark Nikkei.   

The stock is being sold on this report, but it is also part of a broader adjustment for companies like Gree after last year's rally, a trader at a Japanese brokerage said.    

Volume remained thin, with 1.39 billion shares changing hands on the main board, down from 1.67 billion on Wednesday.   

Declining shares outpaced advancing issues 1,209 to 340.     

Many people are thinking that if there's even a small amount of profit, they'll close out right away instead of taking risks, said Fujio Ando, senior managing director at Chibagin Asset Management.

Structural Shift   

Activity by overseas investors were picking up, domestic traders said, adding that U.S. funds sold heavily in morning trade but that there was some buying in chemicals and automakers.   

It seems to me there's a structural shift away from defensives into more cyclical names, a sales trader at a foreign brokerage said, noting that investors had started to pick up shares in automakers and tech companies.   

He also said many investors had underestimated the ability of Japanese exporters to cope with a stronger yen and that any yen softening could mean missed opportunities for investors.   

What people need to understand is that Japanese companies have survived for so long with such a strong yen. Companies have been forced to do some very drastic restructuring and have become a lot more lean, he said.   

Despite a slight pick-up, caution remained ahead of European events.    

Spain is set to sell up to 5 billion euros of 2015 and 2016 paper later in the day, while Italy will offer up to 4.75 billion euros of five-year bonds on Friday.    

The ECB is also set to hold a policy meeting on Thursday.     

Fitch's warning on Wednesday of a euro collapse if the European Central Bank does not step up its bond purchase renewed speculation of an imminent cut to France's triple-A ratings and helped push the euro to a 16-month low against the dollar.

Southeast Asia Markets

Meanwhile, other Southeast Asian stock markets were little changed on Thursday, with appetite for risk assets weak across Asia as investors waited for a Spanish debt sale that is seen as a key test of confidence amid nagging concerns about Europe's debt crisis.   

The Philippines' main share index ended flat. It had climbed 1.9 percent on Wednesday, hitting an all-time high for a second session, but its 14-day relative strength index has moved above the overbought level to 79.2.   

Stocks in Malaysia, Thailand and Vietnam  posted limited gains of 0.21 percent, 0.06 percent and 0.2 percent respectively. Indonesia ended unchanged and Singapore eased 0.13 percent.   

More market weakness is expected in the near term, especially if there is further contagion and debt repayment
concerns in the euro zone, said CIMB regional strategist Chang Chiou Yi.   

The broker maintained an overweight stance on Indonesia and Thailand but was neutral on Malaysia and underweight on Singapore.   
We expect false starts and market weakness in the first quarter but a more positive outlook thereafter, she said.   

We expect up to 14 percent gains for the ASEAN-4 markets in 2012 as a moderate economic turnaround in the second half  should catalyse equity markets, she said. ASEAN-4 refers to the Singapore, Indonesian, Thai and Malaysian markets.   

Asian shares in general were subdued on Thursday. At 0932 GMT, MSCI's broadest index of Asia Pacific shares outside Japan  was up 0.16 percent after briefly touching a one-month high.   

Spain will sell up to 5 billion euros of 2015 and 2016 paper on Thursday. Italy offers up to 4.75 billion euros of five-year bonds on Friday.    

Banking shares advanced in Singapore as analysts expect the lenders to report strong loan growth in the final quarter of the year. DBS Group Holdings Ltd climbed 2.14 percent to a one-month high after a 3.2 percent gain in the previous two sessions.    

The Thai banking index rose 1.2 percent after losing almost 2 percent in the previous two sessions but the prospect of weak fourth-quarter results and higher levies on deposits remained a big concern, traders said.   

Among weak spots, the Philippines' biggest firm by market value, Philippine Long Distance Telephone Co, eased 0.9 percent after a combined 6 percent gain in the previous three sessions.   

Manila took in foreign inflows worth a combined $170 million over 10 consecutive sessions to Wednesday, Thomson Reuters data showed.   

In Jakarta, banks retreated, with PT Bank Mandiri Tbk  easing 0.7 percent, coming off a three-week high hit early in the week.     

Indonesia's central bank kept its benchmark overnight rate  on hold at 6 percent for a second month on Thursday.

(Additional reporting by Viparat Jantraprap.)