UPDATE 1-Japan's Seven & I to start farming operations

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TOKYO, June 19 (Reuters) - Japan's top retailer Seven & I Holdings (3382.T) will start growing its own vegetables to sell at its supermarkets in response to increasing concern among shoppers about food safety, after a string of scandals.

Japanese consumers tend to regard domestically produced goods as safe and high quality, and their preference for home-grown products has further intensified after a food scare this year involving pesticide-contaminated dumplings imported from China.

There have also been a string of scandals involving Japanese food in recent years, involving food ranging from milk and meat to Japanese sweets, that have shaken public trust in the sector.

Investors shrugged off the news, and Seven & I's shares fell 1.8 percent to 3,250 yen by midday on Thursday, in line with a 1.9 percent slide in the Tokyo market's retailer subindex .IRETL.T.

"Most of the vegetables we sell are already Japan-made, but our customers' needs are shifting more and more towards domestically produced goods, so we are responding to that," a Seven & I spokesman said.

"We have been selling vegetables produced by contract farmers, but we have judged that we can ensure safety more by going one step further into production and supply ourselves," he said.

Seven & I operates about 180 Ito-Yokado supermarkets in Japan, generating annual fresh food sales of around 100 billion yen ($927 million). Its agri-business would be one of the biggest such operations run by a corporation, according to the Nikkei business daily.

Companies including tomato ketchup and juice maker Kagome Co (2811.T) and restaurant operator Watami Co (7522.T) have already started farming some of their own produce.

Seven & I plans to start farming from summer and will eventually set up 10 farming firms across the country.

It could also expand sales of its vegetables to group companies in the future, including Seven-Eleven convenience stores and Denny's restaurants, the spokesman said. ($1=107.85 yen) (Reporting by Sachi Izumi; Editing by Hugh Lawson)