Nikkei climbs after U.S. rally, economy worry weighs

*Nikkei up 1.2 pct, on track for first positive day this week

*Gains limited in face of uncertainty about U.S. bailout

*Japan business sentiment turns negative, weighs on market

*Exporters, banks lead rise on short-covering (Adds stocks, details)

By Elaine Lies

TOKYO, Oct 1 (Reuters) - Japan's Nikkei average rose 1.2 percent on Wednesday following a Wall Street rally on hopes that a U.S. financial bailout plan will be revived, but worries about the health of the domestic and global economies capped gains. Nomura Holdings Inc (8604.T) and other financials led the market higher, while exporters like Canon Inc (7751.T) also climbed.

But longer-term worries and uncertainty over the $700 billion bailout plan hung over the market. "Basically, Tokyo's limited gains show the market doesn't really trust the Wall Street rally," said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments.

"Financial instability has now spread to Europe, and investors are worrying about the global economy and what it might mean for Japanese corporate results." Wall Street had its best day in six years on Tuesday as investors bet Washington would salvage the bailout to stabilise the U.S. financial sector after its shock rejection by the House of Representatives a day earlier. [.N]

U.S. President George W. Bush and congressional leaders pledged to continue talks on the plan and the U.S. Senate agreed to vote Wednesday night on a new version of the package that will include a big increase in the amount of bank deposits protected by the government's insurance program. [ID:nHKG09570]

Tokyo market participants also noted that Japan has plenty of worries of its own after a Bank of Japan quarterly "tankan" survey showed business sentiment turning negative for the first time in five years.

The key index for big manufacturers was minus 3, deteriorating for a fourth straight quarter and the first negative reading since the June 2003 poll when the index was at minus 5. [ID:T321897]

"Put the tankan together with a rising number of companies issuing downward revisions, and things are really rather tough as we look ahead to the next corporate results season," said Hideyuki Ishiguro, investment strategy supervisor at Okasan Securities.

But others said the tankan, while certainly not a plus, had only a limited impact as the negative numbers had been widely expected and was in some ways old news.

"If it had been conducted later in the month, things would definitely have been much worse," Ogawa said.

The benchmark Nikkei .N225 gained 139.74 points to 11,399.60 after falling 4.1 percent to a three-year closing low on Tuesday, set for its first day in positive territory this week. The broader Topix was up 1.3 percent to 1,101.40.

EXPORTERS ENERGISED