Nikkei climbs after U.S. rally, economy worry weighs

*Nikkei up 1.2 pct, on track for first positive day this week

*Gains limited in face of uncertainty about U.S. bailout

*Japan business sentiment turns negative, weighs on market

*Exporters, banks lead rise on short-covering (Adds stocks, details)

By Elaine Lies

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, while exporters like Canon Inc (7751.T) also climbed.

But longer-term worries and uncertainty over the $700 billion bailout plan hung over the market. "Basically, Tokyo's limited gains show the market doesn't really trust the Wall Street rally," said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments.

"Financial instability has now spread to Europe, and investors are worrying about the global economy and what it might mean for Japanese corporate results." 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 a day earlier. [.N]

U.S. President George W. Bush and congressional leaders pledged to continue talks on the plan and the U.S. Senate agreed to vote Wednesday night on a new version of the package that will include a big increase in the amount of bank deposits protected by the government's insurance program. [ID:nHKG09570]

Tokyo market participants also noted that Japan has plenty of worries of its own after a Bank of Japan quarterly "tankan" survey showed business sentiment turning negative for the first time in five years.

The key index for big manufacturers was minus 3, deteriorating for a fourth straight quarter and the first negative reading since the June 2003 poll when the index was at minus 5. [ID:T321897]

"Put the tankan together with a rising number of companies issuing downward revisions, and things are really rather tough as we look ahead to the next corporate results season," said Hideyuki Ishiguro, investment strategy supervisor at Okasan Securities.

But others said the tankan, while certainly not a plus, had only a limited impact as the negative numbers had been widely expected and was in some ways old news.

"If it had been conducted later in the month, things would definitely have been much worse," Ogawa said.

The benchmark Nikkei .N225 gained 139.74 points to 11,399.60 after falling 4.1 percent to a three-year closing low on Tuesday, set for its first day in positive territory this week. The broader Topix was up 1.3 percent to 1,101.40.

EXPORTERS ENERGISED

Exporters battered earlier this week helped lead the Nikkei higher on short covering and defensive shares such as drugmakers were also strong.

Canon climbed 5.5 percent to 4,030 yen, becoming the top contributor to the Nikkei 225 by volume weight. Honda Motor Corp (7267.T) rose 1.9 percent to 3,150 yen and Sony Corp (6758.T) rose 2.2 percent to 3,240 yen.

Takeda Pharmaceutical Co Ltd (4502.T) climbed 5.1 percent to 5,520 yen and Astellas Pharma Inc (4503.T) rose 4.1 percent to 4,550 yen. Cosmetics firm Shiseido Co Ltd (4911.T) was up 3.4 percent at 2,425 yen.

Financials also performed well, with Nomura up 5.4 percent to 1,398 yen and the nation's largest bank, Mitsubishi UFJ Financial Group (8306.T) rising 4 percent to 929 yen.

In what may be a sign of things to come as Japan gears up for the season starting later this month, Sumitomo Chemical Co (4005.T) fell 5.9 percent to 428 yen after cutting its annual operating profit forecast by 26 percent to 70 billion yen ($660 million) due to higher naphtha prices and a softer yen.

Trade was moderate on the Tokyo exchange's first section, with 863 million shares changing hands, compared with last week's morning average of 854 million.

Advancing stocks beat declining ones, 963 to 624. (Reporting by Elaine Lies; Editing by Edwina Gibbs)