Nikkei up 1.3 pct, shrugs off N. Korea nuclear test

* Nikkei briefly pares gains after N.Korean nuclear test

* Investors more interested in indicators, GM fate

* Steel shares firm on report of no further price cut

* Dollar's gains against yen also a boost

By Elaine Lies

TOKYO, May 25 (Reuters) - Japan's Nikkei stock average mostly shrugged off news of a North Korean nuclear test to rise 1.3 percent on Monday, with steel shares in favour as concerns of price cuts receded.

Nippon Steel (5401.T), the world's second-biggest steelmaker, and other blast-furnace steelmakers rose after a newspaper reported that major customer Toyota Motor Corp (7203.T) would not seek another price cut from steel mills this financial year, meaning they could see strong profit margins. [ID:nT168789] Drugmaker Shionogi (4507.T) jumped after a report that it plans to market the flu drug peramivir in Japan next year, while construction machinery makers such as Komatsu (6301.T) gained on a brokerage upgrade that cited robust demand in China.

During the noon break, North Korea said it had successfully conducted a nuclear test, causing both Nikkei futures in Osaka JNIc1 and the Nikkei to trim morning gains. [ID:nSEO141656]

But market analysts said that while the news had sparked some immediate profit-taking, the impact was limited.

"North Korea has played this kind of card before. If the test had been carried out by a country that had never done this, the impact would be greater," said Hideyuki Ishiguro, a supervisor at the investment advisory department of Okasan Securities.

"This adds some uncertainty to the regional political picture, but I think investors are paying a lot more attention to economic things right now, such as upcoming indicators and what happens to GM."

Reports later in the afternoon that North Korea had followed the nuclear test with the launch of a short-range missile also failed to faze investors, who were encouraged by the yen's retreat against the dollar.

"The missile launch was a bit of a surprise, but at least it was short-range, something we've seen before as part of regular drills," said Takashi Ushio, head of the investment strategy division at Marusan Securities.

"The yen strength we saw earlier has settled down, and we're seeing some short-covering in stocks now."

The dollar rose 0.3 percent against the yen after the reported missile test and was trading at 95.09 yen, off the day's low of 94.42 yen.

Investors fret about a strong yen because it eats into exporter profits when repatriated.

The benchmark Nikkei .N225 gained 121.19 to 9,347.00 after rising as far as 9,402.76, a gain of 1.9 percent, during early trade. It finished the morning session up 1.1 percent.

The broader Topix gained 0.8 percent to 883.00.

AWAITING GM

Investors are waiting for figures for U.S. existing home sales in April to be released on Wednesday, with new home sales data for the same month due out on Thursday.

General Motors GM.N faces a June 1 deadline to work out issues with its creditors if it wants to avoid a bankruptcy filing. On Friday, a spokesman for some GM creditors said the company's largest bond holders, with a total of roughly $27 billion in debt, plan to reject GM's current offer for a 10 percent equity stake. [ID:nN22369035]

In Tokyo, shares of Shionogi shot up 5.7 percent to 1,952 yen after Kyodo News cited industry sources as saying the drugmaker is expected to seek regulatory approval to market peramivir in Japan as early as next year. Shionogi obtained the Japan rights to the drug from U.S. firm BioCryst Pharmaceuticals (BCRX.O).

The number of cases of H1N1 flu in Japan has topped 300.

Other drugmakers also gained, with Eisai Co (4523.T) climbing 3.9 percent to 3,170 yen, while Daiichi Sankyo rose 4.2 percent to 1,748 yen.

Shares of Komatsu and Hitachi Construction (6305.T) climbed after Goldman Sachs upgraded both companies to "buy" from "neutral", citing strong demand for construction machinery in China and a likely recovery in demand in developing economies.

Komatsu, which was also put on Goldman's conviction buy list, rose 2.6 percent to 1,360 yen, while Hitachi Construction added 2.1 percent to 1,516 yen.

Nippon Steel jumped 2.7 percent to 348 yen, while JFE Holdings Inc (5411.T) added 3.7 percent to 2,970 yen.

The iron and steel subindex .ISTEL.T rose 3.1 percent to become the second-biggest gainer among the subindexes.

Japanese electronics retailers soared, helped by a jump in sales of flat TVs and other goods on the back of a government programme to boost consumer spending by promoting energy-efficient goods. [ID:nT75572]

Kojima Co Ltd (7513.T) climbed 16.6 percent to 619 yen while Bic Camera (3048.T) rose 7.5 percent to 31,150 yen.

Trade was moderate on the Tokyo exchange's first section, with 2 billion shares changing hands, compared with last week's daily average of 2.1 billion.

Advancing stocks outnumbered declining ones by more than 3 to 1.

(Reporting by Elaine Lies; Editing by Edwina Gibbs)