* Nikkei down 0.6 pct this month * Volatility expected to persist for while longer * Market now in correction-phase - analysts * Fast Retailing rebounds after Thursday's 11 pct slide By Dominic Lau TOKYO, May 31 Japan's Nikkei share average recovered some lost ground on Friday as beaten-down stocks rebounded, but the recent market rout saw the benchmark post its first monthly fall in 10 months. The Nikkei, which plunged 5.2 percent to a five-week low on Thursday, gained 1.4 percent to 13,774.54 as weak U.S. economic data overnight eased concerns that the Federal Reserve would soon start unwinding its monthly $85 billion asset purchases. Friday's gain, however, was not enough to extend the benchmark's monthly winning streak to a 10th straight month, which would have been its longest such run since 1972. It was down 0.6 percent in May. Societe Generale said the most traded Nikkei index stock options was a call with a strike price of 12,250, 11 percent below Friday's close, and with a June expiry. The next most traded was another put at 13,000, followed by another put at 12,000. The index has fallen 13.6 percent since hitting a 5-1/2-year peak on May 23, with analysts saying the size of the fall signals the market is now in a correction phase. It ended 7.3 percent lower the same day, its biggest one-day decline since the March 2011 earthquake and tsunami. The selloff, which has been accompanied by extreme volatility, was triggered by the Fed stimulus worries and slowing growth in China, Japan's second-biggest export market. Still, the Nikkei is up 11.4 percent since the Bank of Japan's radical monetary expansion campaign was announced on April 4 and has risen 32.5 percent so far this year, driven by Prime Minister Shinzo Abe's aggressive fiscal and monetary expansionary policies, dubbed "Abenomics". Buoyed by the rally, Japanese stocks' 12-month forward price-to-earnings rose to 16.3, from 13.9 at the end of 2012 and almost level with its 10-year average of 16.4, according to Thomson Reuters Datastream. "There was a little bit of rebound today. People were covering their shorts, or buying into names like Fast Retailing," a Tokyo-based trader said. "People are picking up stocks that they like on weakness." But he said the market would remain volatile until the Japanese upper house election in July, adding that it was an event risk, even though the Abe-led Liberal Democratic Party was expected to win. Nomura Securities said the selloff in stocks "probably constitutes" a challenge to Abenomics. "Although the government remains popular, investor euphoria towards Abenomics appears to be giving way to a more measured stance," the brokerage wrote in a note. FAST FASHION Fast Retailing, the owner of casual fashion chain Uniqlo, climbed 5.1 percent after Thursday's 11 percent slump. Traders said on Thursday that some investors could be using the stock, which has the highest weighting in the benchmark, to help push down the Nikkei. Sentiment was also boosted after sources told Reuters on Thursday that Japan's Government Pension Investment Fund, with more than $1 trillion in assets, was considering a more flexible approach to allocations, which could let its investment in domestic stocks grow in rallying markets. Industrial robot maker Fanuc Corp, wireless operator SoftBank Corp and semiconductor equipment maker Tokyo Electron rebounded, up between 1.6 and 4.1 percent. Sony Corp, which was heavily traded, gained 2.1 percent after cable television network CNBC said the company has tapped Morgan Stanley and Citigroup to help sound out options for its entertainment business. The broader Topix added 0.1 percent to 1,135.78, with 4.15 billion shares changing hands, down from Thursday's 4.48 billion and last week's daily average of 6.21 billion. "The Topix hit an air pocket but isn't making a route change," Nicholas Smith, Japan strategist at CLSA, wrote in a note. "Investors on the sidelines should regard this as a great entry point, including domestic funds." Bank of America Merrill Lynch was also bullish on the market, saying it saw a fall in the Nikkei to below 13,800 as a buying opportunity.