Nikkei may gain after 2-day rout but nuclear worries will weigh

TOKYO (Reuters) - Japan's Nikkei average may rise on Wednesday after suffering its worst two-day rout since 1987 with stocks seen as oversold, but news of another fire at the Fukushima Daiichi nuclear plant in the morning and a quake last night in the Shizuoka area near Tokyo will keep investors on edge.

There were signs in the U.S. that some investors are poised to buy with Nomura's New York derivatives desk reporting large risk-reversal trade in the iShares MSCI Japan Index exchange traded fund, or EWJ (EWJ.P).

The EWJ ETF closed down just 0.2 percent after falling more than 8 percent during the day. Nikkei futures traded in Chicago pared losses to close down 4.3 percent at 8,985 -- after being down by more than 10 percent -- to end 345 points above the Osaka close.

A fire has broken out at the building housing the No.4 reactor of Tokyo Electric Power Co's (9501.T) Fukushima Daiichi nuclear power plant, the electric utility said on Wednesday morning. NHK television later reported that flames were no longer visible at the reactor.

"All indicators show that Japanese stocks are extremely oversold, but the nuclear crisis still looms large and we'll have to see investors' reaction to the latest news about the nuclear plant," said Hiroichi Nishi, general manager at Nikko Cordial Securities.

Nishi said that more than 70 percent of Japanese stocks are trading below their price-to-book value.

"The earthquake last night hit close to Tokyo. Investors will worry because it was close to the capital," said Takashi Hiroki, chief strategist at Monex Inc.

The Nikkei share average .N225 on Tuesday dropped 10.6 percent to 8,605.15, while the Topix share index lost 9.5 percent to 766.73 .TOPX -- both the worst single-day slides since the global selloff after the Lehman Brothers collapse in 2008.

The yen was hovering near a record high against the dollar amid the nuclear crisis and talk that Japanese insurers and companies will repatriate funds to help pay claims and rebuilding costs arising from the quake.

Japanese government bonds are seen under pressure, on expectations that investors such as banks and life insurers may sell more bonds to take profits to make up for losses in stocks.

The yield curve could steepen as traders are nervous about Wednesday's 1.1 trillion yen 20-year JGB auction.

(Reporting by Antoni Slodkowski; Editing by Chris Gallagher)