Nikkei rises but gains curbed by economy worry

(Updates to midmorning)

TOKYO, Oct 1 (Reuters) - Japan's Nikkei average rose 1.2 percent on Wednesday following a Wall Street rally on hopes that a U.S. financial bailout plan will be revived, but worries about the health of the domestic and global economies capped gains. Nomura Holdings Inc (8604.T) and other financials led the market higher, reflecting moves on Wall Street, with additional upward impetus from exporters like Canon Inc (7751.T).

But longer-term worries about both the global and domestic economies were preventing extensive rises, with investors inhibited by a Bank of Japan quarterly "tankan" survey showing Japanese business sentiment turning negative for the first time in five years.

"Even though the bailout now appears likely to pass, there's still a lot of unknowns about it, and then it has to actually be carried out," said Hideyuki Ishiguro, a supervisor in the investment strategy department of Okasan Securities.

"Put the tankan together with a rising number of companies issuing downward revisions, and things are really rather tough as we anticipate the next corporate results season." Wall Street had its best day in six years on Tuesday as investors bet Washington would salvage the bailout to stabilise the U.S. financial sector after its shock rejection by the House of Representatives on Monday, with U.S. President George W. Bush and congressional leaders pledging to continue talks on the $700 billion plan. [.N] The benchmark Nikkei .N225 gained 133.84 points to 11,393.70, while the broader Topix was up 1.1 percent to 1,099.57.

Financial firms battered on Tuesday, when the Nikkei slid 4.1 percent to a three-year closing low, rose on short covering, with Nomura Holdings up 5 percent to 1,392 yen.

Top bank Mitsubishi UFJ Financial Group (8306.T) climbed 2.4 percent to 914 yen and Sumitomo Mitsui Financial Group (8316.T) rose 2.2 percent to 644,000 yen.

Exporters, which investors had dumped on Tuesday amid fears about the world economy, also rebounded, with Canon gaining 4.2 percent to 3,970 yen and Sony Corp (6758.T) up 2.2 percent at 3,250 yen. Honda Motor Corp (7267.T) rose 1 percent to 3,120 yen.

In what may be a sign of things to come as Japan gears up for the corporate earnings season starting later this month, Sumitomo Chemical Co (4005.T) fell 4.8 percent to 434 yen after cutting its annual operating profit forecast by 26 percent to 70 billion yen ($660.3 million) due to higher naphtha prices and a softer yen. (Reporting by Elaine Lies; Editing by Michael Watson)