JGBs slide on stronger-than-expected BOJ tankan

* JGBs fall on profit-taking as tankan better than forecast

* Japan business sentiment worsens less than expected

* Benchmark yield jumps sharply from seven-week low

* Nikkei rebound adds to downward pressure on bonds

By Shinichi Saoshiro

TOKYO, July 1 (Reuters) - Japanese government bonds fell sharply on Tuesday on a stronger-than-forecast Bank of Japan tankan survey, which showed that Japanese business sentiment worsened less than expected in the past three months.

The benchmark 10-year yield, which hit a seven-week low on Monday, jumped on news that the June tankan's headline figure for big manufacturers was higher than the median market forecast. [JPBCLG=ECI]

A rebound by the Nikkei average .N225 in response to the tankan added to downward pressure on bonds.

"JGBs have been rising for almost half a month now, and participants were looking for a chance to sell," said Atsushi Ito, a fixed-income strategist at Morgan Stanley.

"The market was braced for a downbeat tankan, so the better-than-expected results triggered profit-taking."

Though stronger than forecast, the tankan did not show the economy in a particularly positive light.

The headline big manufacturers' index was plus 5, better than the median forecast of plus 3 but still the lowest since September 2003.

September futures eventually trimmed losses, with bargain hunting emerging after the knee-jerk reaction to the tankan. The futures 2JGBv1 dropped to a low of 134.50 but then recovered to 134.76, down 0.69 point.

The 10-year yield JP10YTN=JBTC rose 6 basis points to 1.650 percent after touching 1.645 percent. It touched a seven-week low of 1.585 percent on Monday.

The five-year yield JP5YTN=JBTC was 6.5 basis points higher at 1.235 percent. (Editing by Michael Watson)