Nikkei drops as BOJ tankan disappoints, utility shares underperform

TOKYO (Reuters) - Japan's Nikkei share average fell on Tuesday, retreating from a three-week high, as sentiment was hit by a sombre business confidence survey and as utilities tumbled on a report that Hokkaido Electric Power Co will get a capital infusion from a state-owned lender.

The benchmark Nikkei dropped 0.2 percent to 14,791.99 in choppy trade after rising as high as 14,870.51 earlier, the highest since March 13.

Japanese business sentiment barely improved in the three months to March and is set to sour in the following quarter, the Bank Of Japan's tankan quarterly survey showed, reflecting uncertainty over how much a sales tax hike that kicked off on Tuesday could hurt a fragile economic recovery.

The utility subsector was the biggest sectoral loser, falling 2.1 percent after the Nikkei said that Hokkaido Electric is facing a third year of financial losses and will get a capital infusion from the government-owned Development Bank of Japan. Hokkaido Electric dived 10 percent.

The broader Topix rose 0.1 percent to 1,204.25, and the JPX-Nikkei Index 400, a recently introduced gauge comprised of companies with a high return on equity and robust corporate governance, added 0.1 percent to 10,900.80.

(Reporting by Ayai Tomisawa; Editing by Kim Coghill)