By Junko Fujita and Rocky Swift
TOKYO, March 2 (Reuters) - Japanese shares and the yen fell on Monday, while government bonds rose, after military strikes by the U.S. and Israel killed Iran's Supreme Leader Ali Khamenei.
The benchmark Nikkei 225 Index .N225 shed 0.9% to 58,301.84, paring an earlier decline of as much as 2.7%. The broader Topix .TOPX slid 1.1% to 3,893.77.
The yen weakened 0.3% to 156.48, while the yield on the 10-year Japanese government bond JP10YTN=JBTC fell 1 basis point (bp) to 2.1%.
Bond yields move inversely to prices.
Israel launched a new wave of strikes on Tehran on Sunday, and Iran retaliated with more missile barrages, a day after the killing of Ali Khamenei pitched the Middle East and the global economy into deepening uncertainty.
Airlines were among the biggest decliners, while bank and brokerage shares were hit hard after the bankruptcy of British mortgage provider Market Financial Solutions.
A 10% rise in crude oil prices could push the net profit of Topix-listed companies down about 1% to 2%, said Kazunori Tatebe, chief strategist at Daiwa Asset Management.
"The market is uncertain whether the conflict will go on for a long time or end soon," Tatebe said.
"If it is escalated, the rise in oil prices will hit Japanese firms' earnings."
Chip-related heavyweights dragged on the Nikkei, with Advantest 6857.T losing 2.2% and Tokyo Electron 8035.T falling 0.9%.
Japan's largest airline ANA Holdings 9202.T slid 4.7%, while the country's largest brokerage Nomura Holdings 8604.T fell 6%.
However, the energy explorers' index .IMING.T jumped 4.3%, while Inpex 1605.T climbed 4.1% to become one of the sharpest gainers on the Nikkei.
The Nikkei index is coming off February's sharp 10.4% rise, its best month in four. The benchmark had closed at an all-time high of 58,850.27 on Friday.
"The market was hit just after the Nikkei posted a record high last week," said Takamasa Ikeda, a senior portfolio manager at GCI Asset Management.
"The Middle Eastern conflict has become an excuse to sell stocks and book profits."
(Reporting by Rocky Swift; Editing by Sumana Nandy)
((rocky.swift@thomsonreuters.com;))
