* Nikkei below key 25-day moving average for 1st time in 2 weeks * Domestic earnings expectations lift some local companies By Ayai Tomisawa TOKYO, July 27 (Reuters) - Japan's Nikkei share average fell on Monday, hit by losses in U.S. shares after dismal corporate earnings soured the mood and as worries about slowing global growth capped risk appetite.

The Nikkei share average dropped 0.8 percent to 20,377.45 points by mid-morning, falling below its 25-day moving average of 20,420.36 for the first time in two weeks.

The S&P 500 and Nasdaq posted their largest weekly drops since March on Friday, while weaker equities in turn helped push U.S. Treasury yields further down.

"Investors are concerned that the Fed may raise the rates while there is question on whether its economy is strong enough to accommodate that," said Masashi Oda, senior investment officer at Sumitomo Mitsui Trust Bank.

The Fed's rate-setting Open Market Committee meets on Tuesday and Wednesday and is considered highly unlikely to lift interest rates just yet, though it does still seem set on a move in September.

The global economy started the second half of the year on shaky ground with China's factory sector activity contracting in July at the fastest pace in 15 months and euro zone manufacturing weaker than expected, although U.S. activity picked up.

Oda said that the Japanese market will likely continue outperforming its global peers due to expectations for the recovering economy and stronger corporate profits.

"Companies which rely on domestic demand as well as those which benefit from inbound tourism demand are expected to show strong results," Oda said.

On Monday, financial stocks were lower as investors avoided risk taking. Nomura Securities fell 1.6 percent, and Sumitomo Mitsui Financial Group shed 1.1 percent.

Some companies whose earnings are due out this week were in the spotlight.

Nippon Yusen rose 2.4 percent after the Nikkei business daily reported that the shipper's pretax profit for the April-June quarter likely jumped 70 percent on the year to about 20 billion yen.

Kose Corp jumped 4.6 percent after the paper reported that the cosmetics maker's net profit likely quadrupled to more than 4 billion yen for the period.

The broader Topix fell 0.6 percent to 1,645.52 and the JPX-Nikkei Index 400 declined 0.6 percent to 14,845.05.

(Editing by Kim Coghill)