(Updates to midday)
* Weakening yen threaten grim earnings outlook for large-caps
* Foreigners, institutional investors net sell to drag
SEOUL, Jan 2 (Reuters) - South Korean shares looked set to post their sharpest daily decline in nearly two months in the first session of 2014, with further weakness in the yen hurting the earnings outlook for heavyweight exporters such as Samsung Electronics and Hyundai Motor.
The Korea Composite Stock Price Index (KOSPI) was down 1.2 percent at 1,986.83 points as of 0244 GMT, its sharpest daily percentage drop since mid-November.
"Mixed concerns about currency rates and corporate earnings are dragging the two largest components, translating into the market's decline," said Lee Eun-taek, an analyst at Dongbu Securities.
Samsung Electronics Co Ltd and Hyundai Motor Co together account for 21.1 percent of the KOSPI's total capitalisation.
Despite South Korea's 7.1 percent annual export growth in December and the manufacturing sector's strongest expansion pace in 7-months in December, the depreciating yen against the won posed severe concerns for local exporters.
A weaker yen puts South Korean exporters under disadvantage against their Japanese rivals in price competitiveness, alarming local officials as well as Chinese officials.
Automakers Hyundai Motor and affiliate Kia Motors Corp announced their annual sales target of 4 percent in 2014 on Thursday, which was the weakest target since 2003, citing intensifying global competition and waning price advantage.
Hyundai Motor fell 4 percent and Kia Motors Corp plunged 4.5 percent by mid-session.
Samsung Electronics dropped 3.9 percent on lacklustre forecasts of October-December earnings due to currency moves and shrinking margins in its display business.
The banking sector bucked trend on the back of BS Financial Group Inc, which jumped 2.5 percent after being selected as preferred bidder to buy a regional bank unit of Woori Finance Holdings Co on Tuesday.
Institutional and foreign investors sold a combined net 180 billion Korean won ($170.6 million) worth of KOSPI shares by mid-session, weighing on the index.
Decliners outnumbered advancers 405 to 347.
The KOSPI 200 benchmark of core stocks was down 1.4 percent, while the junior KOSDAQ edged up 0.1 percent.
South Korean stock markets opened an hour later than usual due to a kick-off meeting for the year, but will close at 0600 GMT as usual. ($1 = 1055.3500 Korean won) (Reporting by Jungmin Jang; Editing by Kim Coghill)