JGBs advance on shaky Nikkei, credit worries

* Credit jitters lift bonds after bank shares drop in Wall St

* JGB futures above 138.00 for first time since late April

* Fiscal stimulus concerns seen capping JGBs

By Shinichi Saoshiro

TOKYO, Aug 14 (Reuters) - Japanese government bonds advanced on Thursday, with the benchmark 10-year yield inching down to a fresh four-month low as the market continued to draw support from credit woes and a bleak outlook for the economy.

Shaky Tokyo shares reflected investors' sombre view of the economy, which figures released on Wednesday showed had contracted 0.6 percent in the April-June quarter on weak exports and consumption, ending three quarters of expansion.

The benchmark Nikkei average .N225 slipped 0.3 percent to 12,983.89, its fall below the psychologically important 13,000 threshold providing a lift for bonds.

JGBs also gained support after Wall Street financial stocks fell for a second day on fears of more credit losses. [.N]

"Banking shares fell in Wall Street, and under such conditions concerns over the financial sector and the economy become market drivers," said Maki Shimizu, a fixed-income strategist at UBS Securities.

September 10-year futures 2JGBv1 climbed 0.28 point to 138.01, rising above the 138.00 watershed for the first time since late April.

The benchmark 10-year yield JP10YTN=JBTC dropped 1.5 basis points to 1.430 percent after hitting a fresh four-month low of 1.425 percent.

JGB gains came in the midst of the "obon" summer holidays, when many market participants return to their hometowns for vacations, and traders detected only a sprinkling of real money interest in a holiday-thinned market.

Bleak economic prospects, usually a debt-supportive factor, may ironically work against JGBs if the downturn in Japan's economy continues, analysts say.

The government is mulling putting together an economic package to help the economy, which may rely on a supplementary budget funded by extra debt issuance.

"The market will not be able to test a further upside while prospects of an extra budget linger," said Shimizu at UBS Securities.

Though the initial extra budget is widely expected to be small, market watchers are wary it could snowball.

For the time being JGBs continue to enjoy safe-haven status. Capital flows data released by the Ministry of Finance showed that foreign investors bought a net 1.225 trillion yen ($11.20 billion) of Japan bonds last week, the most in a year, while selling Japan shares for the seventh straight week. [ID:nTKW002988]

The five-year yield JP5YTN=JBTC dropped 1 basis point to 0.990 percent, and the two-year yield JP2YTN=JBTC edged down 0.5 basis point to 0.690 percent. ($1=109.37 Yen) (Editing by Michael Watson)