* Manufacturers' Dec sentiment index +17, service sector +25
* Index seen up further in March, boding well for BOJ tankan
* Recovery broadening helped by demand before sales tax hike
By Tetsushi Kajimoto and Izumi Nakagawa
TOKYO, Dec 9 Confidence at Japanese manufacturers rose for a second month to a three-year high in December and is predicted to continue rising, a Reuters poll found, adding to the evidence of steady recovery in the world's third largest economy.
The service sector's mood also improved for two consecutive months to its best reading in more than 6-1/2 years -- a sign of broadening economic recovery helped by a weak yen and domestic demand sharpened by a national sales tax hike next April.
Reuters monthly poll of 400 big and midsize firms, of which 268 responded, was held between Nov. 22 and Dec. It bodes well for next week's Bank of Japan Tankan, with which it is strongly correlated.
The sentiment indexes for both manufacturers and non-manufacturers are seen improving further in the next three months -- suggesting economic growth will pick up pace towards the current fiscal year-end in March.
The index of sentiment among manufacturers, derived by subtracting the percentage of pessimistic responses from optimistic ones, rose by three points to plus 17 in December, its highest reading since October 2010.
The index is expected to rise further to plus 22 in March, meaning optimists far outnumbered pessimists, the poll showed.
"The yen is weakening and demand is materialising ahead of the planned sales tax hike," said one machinery maker, which saw its business conditions improving.
"Our business conditions are good although there are some projects that show no signs of recovery. Still, our performance turned out better than expected due to effects of a weak yen," one chemicals maker said.
While confidence among makers of manufactured goods including autos and electric machinery steadily improved, sentiment at some other industries such as textiles/paper and food struggled, with firms complaining about a weak currency inflating the import costs of raw materials.
Compared with three months ago, the Reuters Tankan indexes for manufacturers and service-sector firms were up five points respectively, signalling steady gains in the BOJ's closely-watched quarterly tankan survey, due on Dec. 16.
The BOJ's last tankan showed manufacturers' mood jumped in the three months to September to a near six-year high, with service sector confidence up a tad, but that both sectors saw business conditions staying largely unchanged in December.
In the Reuters Tankan survey, the service sector gauge edged up three points in December from a month ago to plus 25, its best reading since April 2007. The index is seen rising further to plus 33 in March.
Retail/wholesale sectors led the gains, suggesting that they are benefiting from increased spending by consumers ahead of the planned sales tax hike. None of the non-manufacturers logged negative readings.
"Sales have grown due to construction demand before the sales tax hike," one retailer said in the Reuters poll. Another firm cited brisk new car sales as the reason for improved sentiment.
Japan's economic growth has outpaced that of its G7 peers this year, but the pace slowed in July-September as private consumption and exports moderated. Economists expect growth to pick up again in the current quarter as consumers rush to buy goods before the planned sales tax hike.
The BOJ stunned financial markets in April by pledging to double base money via aggressive asset purchases to achieve 2 percent inflation in roughly two years. The bank's nine-member board will meet next on Dec. 19-20 to review policy and economic conditions including its December tankan survey.