TOKYO, April 10 (Reuters) - Shares of big Japanese banks dropped sharply on Friday, hit by concerns about their capital strength, after Sumitomo Mitsui Financial Group (8316.T: Quote, Profile, Research) said it may issue up to $8 billion in new shares to raise funds.

Shares of Sumitomo Mitsui, Japan's third-largest bank, were untraded due to a flood of sell orders at 3,110 yen, 13.9 percent lower than Thursday's close.

Sumitomo Mitsui said on Thursday it expected a full-year net loss of $3.9 billion and would sell shares to raise up to 800 billion yen ($8 billion) after being hit by losses on its stock holdings.

"The size of the deal, 800 billion yen, is much bigger than anyone expected," said Kristine Li, bank analyst at KBC Securities in Tokyo.

Issuing that much in new shares would dilute existing shareholder value by about 30 percent, Sumitomo Mitsui Director Takeshi Kunibe said on Thursday.

On Friday, shares of Mitsubishi UFJ Financial Group (8306.T: Quote, Profile, Research), Japan's largest bank, fell 3.3 percent to 505 yen by 0426 GMT, while second-ranked Mizuho Financial Group (8411.T: Quote, Profile, Research) dropped 10.5 percent to 196 yen.

Following SMFG's news, ratings agency Fitch Ratings said it may cut its credit ratings on all three lenders, citing pressure on their asset quality and capital levels. [ID:nN09295305] (Reporting by David Dolan; Editing by Hugh Lawson)