(Reuters) - Japan's blue-chip index snapped a two-day winning run on Thursday and met strong resistance near its 25-day moving average, with the machine tools sector weighed down by a brokerage downgrade.

Industrial robot maker Fanuc Corp (6954.T) lost 3.4 percent and was the second-heaviest traded share by turnover after Bank of America Merrill Lynch downgraded the sector to bearish, traders said.

The Nikkei average .N225 ended 0.8 percent lower at 8,395.16 before a three-day weekend, though it was flat for the week and the 25-day moving average near 8,459 was seen as a key resistance level.

Although credit fears about Europe in the short term have receded, it's not to a point where people are willing to take risks. Investors are saying they don't need to buy yet, and most people are just sitting on the sidelines and watching, said Hideyuki Ishiguro, assistant manager of investment strategy at Okasan Securities.

The Nikkei has suffered less intraday volatility this year than its counterparts in Europe, which is grappling with sovereign debt turmoil. Daily swings in the Nikkei have exceeded 2.5 percent for only 16 trading sessions in 2011, compared with 88 such days for the Euro STOXX 50 .STOXX50E and 41 for the S&P 500 .SPX.

On Wednesday, the European Central Bank's lending to banks eased immediate concerns about a credit crunch in the currency bloc, but analysts doubt the move would be enough to resolve the two-year debt crisis.

Even after the ECB's loans there is a sense this will not necessarily mean that the sovereign debt of those countries will be bought, said Toshiyuki Kanayama, a senior market analyst at Monex Inc.

Many foreign investors have left the market for the Christmas holidays and it's difficult to form new positions ahead of the three-day weekend.

The broader Topix index .TOPX eased 0.4 percent as overseas investors continued to unload Japanese stocks. Foreigners sold a net 210.6 billion yen ($2.70 billion) worth of stocks last week, down from the previous week's 587.7 billion yen, Ministry of Finance data showed.

In terms of valuations, the Topix carried a 12-month forward price-to-earnings ratio of 11.7, slightly more expensive than the S&P 500's 11.3, Thomson Reuters Datastream data showed.

However, the S&P 500 has only lost 1.1 percent so far this year, while the Topix has shed nearly 20 percent.

Among those which are set to become the worst performers in 2011 was Tokyo Electric Power Co (9501.T), which has lost nearly 89 percent.

The stock advanced 5.2 percent on Thursday, however, after the utility company, which has faced a radiation crisis at its Fukushima Daiichi nuclear sparked by the March 11 earthquake and tsunami, said it plans to raise electricity rates for corporate customers in April.