The Nikkei share average <.N225> declined 0.5 percent to 20,555.13 at the midday break, after opening a tad higher. Though sentiment is weak, the index has managed to stay above its 25-day moving average of 20,325.

Investors initially took heart from Apple Inc share price jump after the bell as the iPhone maker reported sharp growth in its services business. That followed its warning earlier this month that revenue would be less than previously expected due to softness in China.

Apple supplier Alps Alpine Co, which cut its annual operating profit outlook on Tuesday, opened higher supported by a share buyback announcement and strong Apple shares but surrendered its gains and was down 4 percent by midmorning.

Another Apple supplier TDK Corp, which is scheduled to report its quarterly earnings on Wednesday, declined 0.5 percent.

"Excessive worries about Apple's performance in the Oct-Dec period receded, but iPhone's output has been falling so there is still uncertainty over the April-June quarter and beyond," said Norihiro Fujito, chief investment strategist at Mitsubishi UFJ Morgan Stanley Securities.

A big drag on the market was Dainippon Sumitomo Pharma Co, which dived 19 percent to its daily limit low of 3,065 yen after the drugmaker and SanBio Co, which is listed on Tokyo's start-up Mothers market <.MTHR>, said that the phase 2B study in the United States evaluating SB623 for treatment of chronic stroke did not meet its primary endpoint.

Dainippon contributed a hefty 26 negative points to the Nikkei benchmark index.

The Mothers market tanked 7 percent, while SanBio remained untraded with a glut of sell orders after the news.

The news caused Mothers index futures to trigger a circuit breaker and halt trade temporarily.

"SanBio is a small cap stock that's stealing the thunder from positive Apple talks in the market," said Katsuhiko Nakaumura, a senior technical analyst at Mizuho Securities. "This news is dragging down the entire market and making investors even more risk averse."

Elsewhere, Akebono Brake Industry Co Ltd plunged 21 percent even as it announced a plan to turn around operations under an out-of-court scheme and present a revival plan to lenders at a meeting next month. Trouble at its U.S. business had hit the company's earnings.

Meanwhile, investors turn next to U.S. monetary policy as the Federal Reserve ends a two-day policy meeting at which it is expected to leave interest rates unchanged having raising them four times last year.

The broader Topix dropped 0.3 percent to 1,552.08.

(Editing by Jacqueline Wong)

By Ayai Tomisawa