UPDATE 3-Tokyo Stock Exchange hit by another system glitch

(For Thomson Reuters service updates on the TSE outage, click on ALERT13 ) (Recasts after market close)

TOKYO, July 22 (Reuters) - The Tokyo Stock Exchange was forced to temporarily halt trading in bond and stock index futures on Tuesday, in the latest computer glitch to hit investor confidence in the world's second-largest bourse.

The exchange suspended trade in futures and options contracts from 9:21 a.m. Tokyo time (0021 GMT), 21 minutes after the open, and did not resume trade until half-way through the afternoon session at 0445 GMT.

Japan's TOPIX index of all first section issues extended gains after the halt was lifted, closing up 2.8 percent as latent demand from arbitrageurs looking to buy stock futures was unleashed.

The TSE has been upgrading its systems and working to regain the trust of investors after a series of computer mishaps in the past few years, including three months of limited trading hours after a stock sell-off in 2006 swamped its systems.

Tuesday's glitch, which follows a similar problem with stock futures in February, may further dent investor confidence in the exchange as it prepares to list its own shares, possibly in 2009.

"It matters from the point of view of market confidence and governance at the organisation," said Neil Katkov, head of Asia research at financial consultancy Celent.

"System issues happen at a lot of exchanges. They seem to be pretty major when they happen at the TSE."

Japanese bond traders said the impact of the outage on JGB futures was limited because domestic investors had squared positions before a three-day holiday weekend and there were no major economic releases during the day.

Japanese markets reopened on Tuesday.

But stock market participants said the resumption of derivatives trade provided a psychological lift even though most futures trading in Japanese shares takes place in Nikkei futures <0#2JNI:>, which are on the Osaka Securities Exchange.

One analyst said much of the late-day jump could be pinned to the uncorking of arbitrage trades held up by the system glitch.

"The system trouble had an impact on the stock market as it took away arbitrage trading between bonds and stocks," said Masayoshi Yano, senior market analyst at Meiwa Securities.

The TOPIX index finished up 2.8 percent, adding to a gain of 1.1 percent before derivates trading resumed. September 10-year futures 2JGBv1 dropped 0.86 point to 135.70, the biggest one-day drop in five weeks. (Writing by Eric Burroughs; Reporting by Elaine Lies, Chikako Mogi, Rika Otsuka, Takaya Yamaguchi, Taiga Uranaka and Nathan Layne; editing by Sophie Hardach)