* Nikkei on track to post biggest weekly drop since February
* Canon falls to lowest level since Feb 2017 on forecast cut
* Mazda Motor weak after media report on new NAFTA rules
By Ayai Tomisawa
TOKYO, Oct 26 (Reuters) - Japan's Nikkei edged lower on Friday morning despite a rebound on Wall Street, as worries about earnings of domestic firms kept investors risk averse after Canon disappointed the market by lowering its annual profit forecast.
After falling to a seven-month low the day before, the Nikkei share average opened a tad higher but turned negative in midmorning trade as concerns about U.S. companies' earnings forecasts lingered.
At the midday break, the benchmark index fell 0.2 percent to 21,221.50. For the week, it has dropped 5.7 percent, on track to post the biggest weekly drop since early February.
Index-heavy stocks such as SoftBank Corp and Fanuc Corp fell 1.3 percent and 1.9 percent, respectively.
Canon Inc tumbled 5 percent to the lowest level since February 2017 after it cut its net profit forecast for the year ending December to 251 billion yen ($2.24 billion) from 280 billion yen, due to weak digital camera sales.
"If more companies report conservative forecasts, the outlook for Japanese shares will be clouded," said Hikaru Sato, a senior technical analyst at Daiwa Securities.
He also said that the market is bracing for weaker U.S. shares indicated by falling U.S. futures after disappointing results on Thursday from tech giants Alphabet Inc and Amazon.com heightened concerns over world trade and economic growth.
Japanese exporters such as automakers rebounded from Thursday's sell-off, but Mazda Motor fell 0.3 percent after the Nikkei business daily reported that the new U.S.-Mexico-Canada trade deal requires engines and six other components to be made in North America for cars to enjoy tariff-free access.
Yoshihiro Okumura, general manager at Chibagin Asset Management, said while companies now make engines and core auto parts in Japan, "they will have to start making those parts in North America if they don't want to get a tariff impact."
"They may have to make supply chain transformations," he said. "If they want to enjoy tariff-free access, they will have to raise an output of locally produced parts."
The Nikkei said midsize players such as Mazda Motor and Subaru Corp are likely to feel the biggest impact as new production facilities for parts like engines and transmissions can cost about $90 million.
Toyota Motor rose 0.8 percent, while Honda Motor added 1.6 percent and Nissan Motor gained 1.3 percent.
The broader Topix shed 0.1 percent to 1,599.66. ($1 = 112.2800 yen) (Editing by Richard Borsuk)