* Sharp shares jump on report of capital tie-up with Intel * Japan Tobacco rises on reassuring Imperial Tobacco update * Nikkei down 0.2 pct this week, set for 1st weekly fall in 3 weeks By Dominic Lau TOKYO, Sept 21 (Reuters) - Japan's Nikkei average rose on Friday, rebounding after the previous session's sharp fall as investors took comfort that U.S. stocks were largely steady, shrugging off fears over soft manufacturing data from China, Europe and the United States. Embattled TV maker Sharp Corp was the focus after the Mainichi newspaper said it is in talks with U.S. chipmaker Intel Corp on a capital alliance that would offer a possible lifeline to the firm as discussions with Taiwan's Hon Hai Precision Industry Co Ltd stall. Sharp, which denied the report, surged 5.5 percent on short covering and was the most-traded stock on the main board by turnover. The Nikkei advanced 0.6 percent to 9,142.29 after shedding 1.6 percent on Thursday to a one-week closing low and giving up the gains from Wednesday when the Bank of Japan eased monetary policy. "The market was a bit oversold yesterday ... Obviously China was a bit weak and a little bit of disappointed reaction to this BOJ easing," a senior trader at a foreign bank said. "We are even buy-to-sell. It seems to be more domestic sectors rising today ... I wouldn't have thought too much upside from here being a Friday." Gains in Japan Tobacco Inc, up 3.3 percent after rival Imperial Tobacco rose 2.7 percent overnight following a reassuring trading update, also supported the market. The broader Topix index gained 0.5 percent to 757.75 in light trade, with 44 percent of its full daily average for the past 90 days. "Once investors cover their short positions, the market will shift to fundamentals. But unfortunately, fundamentals are not good at the moment," said Shun Maruyama, chief Japan equity strategist at BNP Paribas. "With the second quarter results announcements around mid-October to early November, people will start taking short positions ... expecting earnings to be revised down." He said he kept his Nikkei year-end target at 9,300, an 1.7 percent upside from current levels, even though the U.S. Federal Reserve, the European Central Bank and the BOJ had announced further stimulus. CHINA PLAYS Sputtering growth in China, the world's second-largest economy and Japan's biggest trading partner, and anti-Japan protests over a territorial dispute, remained a concern. Panasonic Corp said it did not know when it will be able to resume production at its protest-damaged factory in the Chinese port city of Qingdao, and it could not yet give an estimate on how the plant closure will affect its earnings. The stock eased 1.6 percent. About 40 percent of Japanese firms see friction with China affecting their business plans, with some considering pulling out of the country and shifting operations elsewhere, a Reuters poll showed. Construction machinery makers Komatsu Ltd and Hitachi Construction Machinery Co Ltd, which have significant exposure to China, shed 1.9 and 1 percent, respectively. Steelmakers, whose fortunes are also closely tied to Chinese and global demand, lost 1.7 percent. The Nikkei is down 0.2 percent so far this week. If it were to finish with current loss, it would be the first weekly fall in three weeks. Capital flow data from Japan's Ministry of Finance showed that foreign investors were net buyers of Japanese stocks last week for the second straight week after two weeks of net selling. For the year, the Nikkei is up 8.1 percent, trailing a 16.1 percent rise in the U.S. S&P 500 and a 12.3 percent gain in the pan-European STOXX Europe 600. Still, Japanese equities have a similar valuation to European shares, with a 12-month forward price-to-earnings ratio of 11.1, versus STOXX Europe 600's 11 and S&P 500's 12.9, according to Thomson Reuters Datastream.