* Manuf sentiment DI +6, non-manuf +7 -Reuters Tankan
* Exports -3.3 pct yr/yr versus forecast -2.4 pct yr/yr
* Strong yen, slowdown in overseas economies clouds outlook
* Japan FX intervention still on cards as yen gains persist
* About 30 pct see power shortages pushing production abroad -poll (Adds separate poll)
By Rie Ishiguro and Tetsushi Kajimoto
TOKYO, Aug 18 (Reuters) - Japan's business mood improved in August and is expected to brighten further as manufacturers restore output to pre-disaster levels, a Reuters poll showed, but a rising yen and slackening foreign demand have started taking their toll on exports.
Companies in the Reuters Tankan survey expressed growing concern about the currency's rise while trade data also published on Thursday showed recovery in exports slowed markedly last month when the yen soared against a weakening dollar.
Slowing exports pose a risk to the world's third-largest economy, which is about to pull out of a recession triggered by a massive earthquake and tsunami in March that caused the world's worst nuclear power crisis in 25 years, since Chernobyl.
Exports inched up from June but were down more than expected in comparison with July 2010. Shipments to China and the United States -- Japan's key markets -- both fell.
Domestic demand, driven by companies retooling and boosting output, is bolstering business sentiment and the economy is expected to bounce strongly in the present quarter.
However, the strong yen, uncertainty about global growth and the timing of government-funded rebuilding efforts are clouding the outlook.
"Reconstruction demand has kicked in at sectors such as construction, utilities and fisheries thanks largely to private-sector investments," said Minoru Masujima, director for the Cabinet Office's department of business statistics.
"Everyone has been expecting 'reconstruction demand' to boost the economy from July-September, but such a scenario is far from certain as it is unclear when the government can implement a third extra budget to fund fully-fledged rebuilding."
The government plans to spend 13 trillion yen ($169.8 billion)to rebuild coastal areas ravaged by the tsunami in addition to 6 trillion yen already earmarked for post-disaster relief and clean-up.
But it is not clear when the next emergency budget will be passed and the money will start flowing, given that the unpopular Prime Minister Naoto Kan is on his way out and it may take weeks before a new cabinet is formed.
Some companies have already benefited from private sector-driven demand, the Reuters poll showed, but a delay in government's spending could threaten a V-shaped recovery expected in the next two quarters.
Construction machinery maker Komatsu Ltd has reported a 24 percent rise in operating profits in April-June from a year earlier due in part to demand related to rebuilding factories and facilities damaged by the March disaster.
MANUFACTURING MOOD LAGS SERVICE SECTORS
Exports fell 3.3 percent in July from a year earlier against an 2.4 percent annual decline expected by economists, as shipments to the U.S. and China fell 8.2 percent and 1.0 percent respectively.
Compared to the previous month, exports rose 0.8 percent, slower than a 5.4 percent rise in June, Ministry of Finance data showed.
The Reuters Tankan survey showed the manufacturing index, derived by subtracting the percentage of pessimistic responses from optimistic ones, rose five points from July to plus 6, still well below plus 15 seen just before the March disaster.
The index for non-manufacturers rose four points from July to plus 7, its highest level since December 2007 and exceeding the manufacturing index for the second straight month.
"That clearly reflects the impact of heightened global uncertainty due to the downgrading of the U.S. (credit rating) and the persistent sovereign debt woes in Europe," said George Worthington, chief economist at IFR Markets.
"For the moment, domestic-oriented companies appear to be more positive than export-oriented, though domestic demand conditions remain generally sluggish."
The yen , which gained about 5 percent against the dollar since early July, did not budge after the data, hovering just below the record high of 76.25 to the dollar and prompting a customary warning from Finance Minister Yoshihiko Noda that he is keeping a close watch on market movements.
Tokyo intervened on Aug. 4 by selling a record of about 4.5 trillion yen in the currency market, but the yen quickly climbed back against the weakening dollar to pre-intervention levels.
A separate Reuters survey showed 29 percent of respondents among manufacturers saw the suspension of atomic power plants as a potential factor to shift production overseas, up from 25 percent in July, highlighting worries about the hollowing out of industries amid power shortages and yen's gains.
The March 11 earthquake and tsunami triggered meltdowns and radiation leaks at a nuclear power plant in Fukushima , shattering public confidence in nuclear power. Th is has darkened the outlook for the restart of off-line reactors and raised the possibility that all of Japan's 54 reactors could be shut down by May 2012. ($1 = 76.565 Japanese Yen) (Additional reporting by Yoko Kubota and Stanley White; Editing by Tomasz Janowski and Richard Borsuk)