TOKYO -- After two days of big gains in Japan, most investors booked profits in bank shares and other blue-chips on Thursday, but fund managers awash in new cash moved into small-cap tech stocks.

Overnight news about the possible closure of U.S. hedge fund

Tiger Management

made many traders nervous. While the head of futures trading at a large U.S. firm characterized any closure of Tiger as "shocking," most of the market seems to believe that Tiger has already liquidated most of its Japanese positions.

The

Nikkei 225

index fell 265.15 points, or 1.3%, to 20,441.50, while the

Topix

index, which includes all shares listed on the

Tokyo Stock Exchange's

first section, was down 20.39, or 1.2%, to 1712.45. The

Jasdaq

small-cap index lost 0.23 to 114.04, while the Nikkei

over-the-counter

index gained 28.45, or 1.2%, to 2355.07.

Bank shares were weaker on news that the

Tokyo Metropolitan Assembly

will today pass a bill that slaps a 3% tax on gross profits of financial institutions. Although a banking consortium is reportedly planning to file a suit next month to block the tax, the sector was still weaker. The Bank of

Tokyo-Mitsubishi

(MBK)

fell 50 yen, or 3.3%, to 1477.

Sony

(SNE) - Get Report

rose 770, or 5.6%, to 14,500. The

Nihon Keizai Shimbun

said the firm would recall start-up software on the 1.25 million PlayStation2 game consoles it has shipped so far, in order to fix faulty DVD drives. Sony announced that

Sakura Bank

(SAKUY)

and

JP Morgan

would be taking stakes of 16% and 4%, respectively, in its planned Internet bank.

NTT DoCoMo

, down 60,000, or 1.4%, to 4.31 million, said it would take a 2.02% stake in PlayStation.com, Sony Computer Entertainment's online shopping arm.

After Lehman Brothers affirmed its buy rating for

Softbank

, shares climbed 5000, or 5.5%, to 96,000. Fund managers were targeting OTC darling

Net One Systems

, up 500,000, or 14.2%, to 4.03 million, taking note of its strong business ties with

Cisco

(CSCO) - Get Report

.

Meanwhile, equity traders said much of the selling in tech stocks seen over the past month could easily have come from one of the Tiger funds. Bond traders speculated that Tiger was closing out positions in one-to-two-year interest rate swaps today.

"If we're hearing merger and liquidation talk on Tiger right now, it means they've already done it. It was good timing if they shorted or sold off Japanese equities over the past month, that's for sure," one trader said, asking not to be named.

The dollar inched down to 105.55 yen, as currency dealers speculated that another

Bank of Japan

intervention to prop up the dollar could emerge around the 105.00 yen level.

In Hong Kong, the key

Hang Seng

index closed down 629.22, or 3.5%, to 17,467.15, unable to shake off the

Nasdaq's

3.9% drop overnight.

HSBC

(HBC)

fell HK$0.50 to 91.50, while

China Telecom

(CHL) - Get Report

shed 5.50, or 7.4%, to 69.25.

Bank of East Asia

(BKEAY)

, up 0.25, or 1.5%, to 17.50, said it was considering opening up a new Internet bank through its subsidiary,

United Chinese Bank

. BEA said it would need regulatory approval but would like to see its Net bank open up by the end of this year.