Nikkei up 1.7 pct on economy hopes, politics eyed

* Nikkei buoyed by U.S. stock gains, optimismon economy

* Deal to rescue CIT group relieves financial system worry

* Eyes on Japan election but stocks impact limited for now

* Resistance strong near 25-day moving average around 9,600

TOKYO, July 21 (Reuters) - Japan's Nikkei average climbed 1.7 percent as optimism grew about a recovery in the U.S. economy, reviving investor appetite for riskier assets and lifting blue-chip exporters such as Canon Inc (7751.T). Itochu Corp (8001.T) and other trading houses advanced on rising metals prices and firm oil, but trade was light as investors turned their attention to politics.

Japanese Prime Minister Taro Aso dissolved parliament's lower house on Tuesday for an election on Aug. 30 and vowed to restore voters' faith in his fractious ruling party, which polls show is in danger of a historic defeat. [ID:nT98448]

Market analysts and traders said political developments were not a strong trading factor for the day, although the benchmark Nikkei rose a little from the level where it finished the morning session after parliament was dissolved.

"We have a bit of a gap before the election and there'll be political uncertainty until August 30 so that isn't good for the market," said Hiroaki Osakabe, a fund manager at Chibagin Asset Management.

"There certainly are hopes for change but more important than that is the Democratic Party actually showing that they'll be able to carry out change."

Over the longer term, worries about how the Democrats would fund their proposed social programmes could weigh on the market, analysts said. Most of the Nikkei's gains came as it moved to play catch-up after a holiday on Monday.

U.S. stocks jumped on Monday, with the S&P 500 hitting an eight-month closing high, after CIT Group Inc (CIT.N), a lender to nearly a million small and mid-sized U.S. companies, reached a deal with bondholders for $3 billion in emergency financing. [ID:nN206604]

The benchmark Nikkei .N225 rose 161.10 points to 9,556.42 after rising as far as 9,588.77, while the broader Topix gained 2 percent to 895.58.

Strong resistance for the Nikkei is seen just above 9,600, which is where its 25-day moving average -- the often-quoted Japanese proxy for a trading month -- comes in.

"If and when we do break above it, though, this is likely to become support, with a spate of buying sending the Nikkei higher, perhaps quickly," said Nagayuki Yamagishi, a strategist at Mitsubishi UFJ Securities.

EXPORTERS, CHINA, TRADERS

Exporters rose broadly on optimism about the U.S. economy, with Canon up 2.3 percent at 3,160 yen, Panasonic Corp (6752.T) climbing 4.5 percent to 1,261 yen and Sony Corp (6758.T) advancing 1.8 percent to 2,305 yen. Toyota Motor Corp (7203.T), the world's biggest automaker, was up 2.3 percent at 3,590 yen.

Toyota North America is reworking its U.S. manufacturing strategy to account for idle capacity and shifting corporate priorities, the president of the unit told reporters on Monday. [ID:nN20127597]

Strong metals prices sent trading houses climbing.

Itochu Corp (8001.T) shot up 5.2 percent to 671 yen and Mitsubishi Corp (8058.T) gained 4.4 percent to 1,775 yen, with expectations of a recovery in China buoying these shares as well. (Reporting by Rika Otsuka and Elaine Lies; Editing by Michael Watson)