JGB gains limited on money market worries

* JGB gains limited on worries about dealer selling for cash

* Traders cite poor liquidity across markets, moves choppy

* Nikkei falls 10 pct, holds above 5-1/2-yr low

By Eric Burroughs and Satomi Noguchi

TOKYO, Oct 16 (Reuters) - Japanese government bond futures edged up on Thursday but struggled to hold gains as market players fretted that the strains in money markets could force dealers to sell paper to raise cash.

Even as the Nikkei share average .N225 slid 10 percent, normally safe-haven government debt failed to benefit much on worries that bond dealers may sell like they did last Friday when the key repurchase market for funding their inventories froze.

Dealers were also cautious before a 1.9 trillion yen auction of five-year bonds given the rocky conditions in the market, though investor demand was expected to be solid given the mounting worries that the global economy faces a sharp recession.

The Ministry of Finance offered the new bonds with a coupon of 1.2 percent, up from 1.1 percent on the previous monthly issue. "JGB yields have not fallen much compared with the magnitude of Tokyo stock slide, and one of the biggest factors is the lack of liquidity that is making it difficult for dealers and investors to take big positions," said Akito Fukunaga, a fixed-income strategist at Credit Suisse.

"But before long JGB yields will catch up to other markets and fall as worries are growing about the economic slowdown," he said.

December 10-year futures 2JGBv1edged up 0.05 point to 135.85 but pulled back from a high of 136.39. Futures slid to a three-month low of 135.74 the previous day.

The benchmark 10-year yield JP10YTN=JBTC was flat at 1.580 percent after initially falling to 1.530 percent.

The five-year yield JP5YTN=JBTC was flat at 1.170 percent, while the two-year yield JP2YTN=JBTC dropped 3 basis points to 0.765 percent. (Editing by Edwina Gibbs)