JGBs gain on weak U.S. data, sagging Nikkei

* JGBs extend gains with Fed rate hike prospects doused

* Nikkei hits 6-week low, provides further support for debt

* Benchmark JGB yield touches one-month low

* Focus shifting to growth prospects from inflation

By Shinichi Saoshiro

TOKYO, June 25 (Reuters) - Japanese government bonds rose on Wednesday after a set of weak U.S. economic data released the previous day reinforced views that the Federal Reserve will stand pat on policy after wrapping up a two-day meeting later in the day.

A 1.5 percent slide in the Nikkei share average .N225 also supported JGBs, pushing the benchmark 10-year yield to a one-month low.

Though a wait-and-see mood prevailed ahead of the Fed meeting, bond market participants gained assurance that the Fed's ability to tighten monetary policy later this year was restricted by more data highlighting the U.S. economy's woes.

The U.S. reports showed a record annual drop in home prices and consumer confidence tumbling to a 16-year low, casting doubts on the Fed's ability to hike interest rates and sparking a rise in Treasuries. [ID:nN24338474]

"Tuesday's release showed that the deterioration in U.S. economic indicators took a turn for the worse," said Naomi Hasegawa, a senior fixed-income strategist at Mitsubishi UFJ Securities.

"It is leading to expectations that the Fed may not hike after all, or even if it did, the tightening will not lead to a series of hikes," she said.

The rebound in JGBs has also come as investors have had second thoughts on just how quickly the Bank of Japan could raise interest rates, even as the market is bracing for an increase before the end of the fiscal year next March.

September 10-year futures 2JGBv1 rose 0.31 point to 134.46.

The benchmark 10-year yield JP10YTN=JBTC dropped 2 basis points to 1.675 percent after brushing 1.665 percent, a one-month low.

Investors shrugged off data showing Japan's exports rose more than expected in May thanks to growth in Asia and other developing countries, with economists warning that the U.S. downturn should eventually hurt other parts of the world. [ID:nT257783]

ECONOMY IN SPOTLIGHT

Market watchers said weak economic indicators released both at home and abroad are leading to a change in participants' priorities.

"Inflation appears to be giving way to economic conditions as the main theme, and the shift is driving yields lower," said Koji Ochiai, a senior market analyst at Mizuho Securities.

A government survey earlier this week showed business sentiment hitting a four-year low in the April-June quarter, pointing to a poor reading in the BOJ's closely watched tankan survey due next Tuesday.

The belly of the yield curve, which is more sensitive to changes in monetary policy expectations, outperformed on Wednesday. The five-year yield JP5YTN=JBTC declined 4.5 basis points to 1.245 percent.

"The Bank of Japan will find it all the more difficult to resume hiking rates again if downward risks to the economy increase, and such expectations are having a particularly pronounced impact on the midterm sector," said Ochiai at Mizuho Securities.

The 20-year yield JP20YTN=JBTC fell 1 basis point to 2.210 percent.

The Nikkei share average .N225 tumbled 1.5 percent to a six-week intraday low on Wednesday, hurt by prospects of an economic slowdown in the United States and near-record oil prices. [.T]