* Nikkei rises 0.3 pct, Topix sheds 0.3 pct * Corporate tax cut report sparks short-covering * U.S. govt shutdown, debt limit row weigh on sentiment * Advantest slumps after cutting full-yr earnings forecast By Tomo Uetake TOKYO, Sept 26 (Reuters) - Japan's Nikkei average posted modest gains on Thursday morning as a media report on plans for corporate tax cuts helped to erase earlier losses sparked by worries of a U.S political deadlock over its budget and debt ceiling. The benchmark Nikkei was up 0.3 percent at 14,670.51 by the midday break, though it fell as much as 1.4 percent in earlier trade. The index has fallen in the past three days but is up 40 percent this year. Trade was fairly light, with volume on the Nikkei at 34.9 percent of its full daily average for the past 90 days. Triggering a turnaround in the market was a report by Kyodo News wire that the government plans to say it will study cutting corporate taxes in an economic package Prime Minister Shinzo Abe is expected to announce in the near future. "The report sparked short-covering now. We have to see whether it will lead to more full-fledged buying and more consolidation in the market in the afternoon," said Hiroyuki Fukunaga, CEO at Investrust. Before the report, Tokyo shares tracked losses in Wall Street, weighed by concerns over two looming Washington deadlines, a possible U.S. government shutdown next week and looming talks to raise the federal borrowing limit. "The two debates in the U.S., government shutdown and the debt ceiling, worsen clarity about what the ultimate outcome will be. As a result of that uncertainty, it's not surprising that people want to take some risk off," said Stefan Worrall, director of equity cash sales at Credit Suisse in Tokyo. "And there's nothing else yet to focus on." Still, Worrall, like most market players, sees it as a temporary issue, expecting some sort of political compromise will be reached by mid-October. "Once we get over that and the clarity returns, I expect the bull market to resume. I think fundamentals for Japan remain very strong and exciting." U.S. stocks fell on Wednesday and the S&P 500 put in a fifth day of losses, its longest losing streak since the end of 2012, on jitters funding for the federal government would run out. Advantest tumbled as much as 9.8 percent to a nine-month low after the world's largest maker of chip testing equipment warned it would post a net loss for a third year in a row, as demand for chips for smartphones and tablets fell short of its expectations. Financials were also weak, tracking a negative lead from Wall Street. Mitsubishi UFJ Financial Group Inc, Sumitomo Mitsui Financial Group Inc, Mizuho Financial Group Inc fell between 1.1 percent and 1.4 percent. On the upside, shippers rose 2.6 percent to become the best sectoral performer. Index heavyweights were in demand, with Fast Retailing Co Ltd and SoftBank Corp advancing 2.9 percent and 3.7 percent, respectively. The broader Topix ended the morning session 0.3 percent lower at 1,207.96.