JGBs climb as Nikkei falls on credit concerns

* Tokyo stock market slide prompts dealers to pick up JGBs

* Reduced expectations for Fed rate hikes diminish prospects for BOJ hike

* Investors eye five-year JGB auction this session

By Satomi Noguchi

TOKYO, July 8 (Reuters) - Japanese government bonds rose on Tuesday, recovering from a sharp fall the previous day, as Tokyo shares tracked Wall Street lower on renewed worries about the health of the financial sector.

JGBs also got a boost after U.S. Treasuries rose the previous day on concerns that the two largest U.S. mortgage providers would have to raise even more capital amid larger-than-expected losses.

Such worries further reduced expectations for a near-term Federal Reserve interest rate hike, analysts said.

Cooling expectations for rate hikes overseas also helped diminish the prospects for a Bank of Japan rate hike and improved market sentiment ahead of a 1.9 trillion yen ($17.73 billion) auction of five-year debt later in the session, analysts said.

"Market sentiment is bright this morning, erasing losses made the previous day, which were probably too much even ahead of the auction," said Keiko Onogi, senior JGB strategist at Daiwa Securities SMBC.

September 10-year futures 2JGBv1 climbed 0.60 point to 135.13. They fell nearly full point from the day's high the previous day as dealers rushed to sell futures and cash bonds to make room on their books ahead of the auction.

The benchmark 10-year yield JP10YTN=JBTC fell as much as 4 basis points to 1.655 percent before rebounding a tad to 1.660 percent.

The yield of the current No. 72 five-year note JP5YTN=JBTC fell 4 basis points to 1.245 percent.

The Ministry of Finance set a 1.3 percent coupon for the new five-year issue, as expected, down from 1.5 percent at the previous auction in June.

Despite the lower coupon, analysts said lower volatility in medium maturities amid falling stock prices should bode well for demand as investors test the water after enduring a severe market sell-off from late March to mid June.

The Nikkei share average .N225 fell 1.8 percent by midday.

Swap contracts on the overnight call rate JPONIBOJ=TRDT show that investors see a roughly 25 percent chance of a quarter-point BOJ interest rate increase by year-end.