JGBs slide on stronger-than-expected BOJ tankan

* JGBs fall on profit-taking after tankan

* 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 after the Bank of Japan's tankan survey showed that business sentiment worsened less than expected in the past three months.

Market players had been eyeing the quarterly survey to see how much the surge in oil and commodity prices had hurt confidence and capital spending plans of large companies.

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 partly 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."

Still, the tankan did not show the economy in a particularly positive light.

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

Furthermore, capital spending plans by companies, though above expectations, were the weakest in six years for a June survey.

"The survey confirmed the economy is moderately slowing, indicating a deterioration in business confidence as well as corporate profits," said Makoto Yamashita, chief JGB strategist at Lehman Brothers.

"The tankan was not something that would prompt investors to expect a BOJ rate hike. It focuses attention on downside risks to the economy, and losses in JGBs should be limited," he said.