* Blue-chips lead gains * Cyprus parliament to vote on bailout later on Tuesday * Underlying trend still bullish- analysts By Tomo Uetake TOKYO, March 19 (Reuters) - Japan's Nikkei average rebounded 2 percent at the midday break on Tuesday, regaining some ground lost in the previous session after a controversial bailout proposal for Cyprus raised concerns about the stability of Europe's banking sector. The Nikkei gained 246.55 points to 12,467.18 after sliding 2.7 percent on Monday, its biggest one-day drop in 10 months. "On Monday, futures-led selling that pushed the Nikkei and Topix down while many smaller, individual stocks, remained intact. So today, some blue-chips that fell yesterday are bouncing back," said Kenichi Hirano, market analyst at Tachibana Securities. Ahead of a parliamentary vote in Cyprus that will either secure the island's financial rescue or threaten default, euro zone ministers have urged Cyprus to let smaller savers escape a controversial levy on bank deposits. Still, investors are concerned that forcing ordinary citizens to fund the bank rescues up front, through a tax on deposits, is setting a precedent that could lead to other bailout countries imposing something similar on depositors. Overnight losses in European markets and Wall Street were not as severe as in Tokyo on Monday, helping ease investors' concerns. Europe's FTSEurofirst 300 slipped 0.3 percent and U.S. S&P 500 eased 0.6 percent. Sony Corp surged 4.9 percent and was the most traded on the main board by turnover. Mazda Motor Corp jumped 4.2 percent and Nikon Corp rose 3.5 percent. Other notable gainers included Sumco Corp, up 5.2 percent after Citigroup raised the silicon wafer maker's target price by 42 percent and increased its operating profit forecast for the fiscal year ending January 2015 by 4.2 percent. All but one of the 33 sectors gained. Shippers climbed 5 percent to become the best sectoral performer on the board. The broader Topix index was up 1.7 percent at 1,045.86 by the break. The benchmark Nikkei has rallied nearly 44 percent since mid-November after Prime Minister Shinzo Abe embarked on aggressive fiscal expansionary and monetary easing policies to revive the ailing economy. The index was 5.9 percent above its 25-day moving average, which is currently at 11768.41, and Hirano said he sees the market is in a correction phase. "I expect the current correction phase to last until the divergence between the Nikkei and its 25-day moving average to come within 0.5 percent, which I think will be around the middle of next week. Yet the underlying trend is still bullish." Investors are also focused on the U.S. Federal Reserve's two-day policy-setting meeting starting later in the day and the change of leadership at the Bank of Japan this week. STILL UPBEAT Goldman Sachs remained upbeat on Japanese equities, lifting its 12-month Topix target to 1,250 from 1,100. "Without a doubt, going "long Japanese equities" has become one of the most popular trades among global investors in 2013. This is not to say, however, that every long-only foreign investor is neutral or overweight Japan," Goldman Sachs said in a note. "We estimate that if the underweight gap of 2.8 percentage points of EAFE-benchmark mutual funds were to close, this could imply roughly $42 billion of potential foreign inflows from this investor segment." Foreign investors bought 1.12 trillion yen ($11.7 billion) worth of Japanese shares in the week through March 9, their largest net purchase since the Ministry of Finance began collecting the data in 2005. They bought a total of 5.36 trillion yen in the past 17 weeks, versus 5.80 trillion in the 19 straight weeks of net buying when reformer Junichiro Koizumi was the prime minister.