CORRECTED - CORRECTED-Nikkei claws narrowly higher, Nippon Oil gains

(Corrects paragraph 12 to show Nikkei's quarterly gains are 22 percent, not 12 percent)

* Nikkei up on hopes that recession easing, but sluggish

* Profit-taking emerges after sharp gains on Thursday

* Nippon Oil up on report of likely Iraq oil deal

* Suzuki Motor up on possible VW cooperation deal

By Elaine Lies TOKYO, June 26 (Reuters) - Japan's Nikkei stock average clawed 0.2 percent higher on Friday, after stronger-than expected earnings from a U.S. retailer buoyed hopes that the U.S. economic recession may be easing.

Nippon Oil Corp (5001.T) jumped over 4 percent after a newspaper reported that it and other Japanese companies are in the final stage of talks with Iraq to win the development contract for Iraq's huge Nassiriya oilfield. [ID:nT306956]

Suzuki Motor (7269.T) climbed after a source familiar with the matter said Volkswagen (VOWG.DE) is exploring a potential cooperation deal with Suzuki as a way to boost its expertise in the area of ultra-small cars. [ID:nLP51283]

Though market analysts had predicted sharp gains prior to the opening, rises were sluggish in thin trade as investors moved to lock in profits after the average posted its best day in a month on Thursday, rising 2.2 percent.

The Nikkei gained 23.21 points to 9,819.29 after briefly moving into negative territory, while the broader Topix rose 0.3 percent to 922.68.

"The market climbed yesterday mainly on demand factors and not on fundamentals, and investors are moving to take profits ahead of the weekend," said Hiroaki Osakabe, fund manager at Chibagin Asset Management.

But sharp losses were unlikely after the Nikkei on Thursday climbed back above its 25-day moving average, which provided support throughout the benchmark's three-month rally from March. The 25-day moving average now comes in around 9,700.

Better-than-expected earnings from U.S. retailer Bed Bath & Beyond (BBBY.O) helped revive a sense that the U.S. recession may be starting to ease.

"Everyone recognises that the market is heading for recovery, and this is likely to be verified when Japanese companies start reporting results next month. The mood is improving," said Hiroichi Nishi, general manager at the equity division of Nikko Cordial Securities.

He added that while the Nikkei appeared to be gaining some strength from so-called window-dressing -- selling stocks with large losses and buying those with strong gains to boost portfolio performance -- ahead of the end of the quarter next week, this was not the only reason for its rises this week.

"It's mainly macroeconomic fundamentals -- the road ahead for the economy appears to be pretty bright."