* Benchmark trading solidly above 25-day moving average * Investors await market reaction to Italy's austerity plan * Financial stocks outperform * Volume thin By Mari Saito TOKYO, Dec 5 (Reuters) - The Nikkei stock average edged higher on Monday to build on last week's hefty gains, helped by improved sentiment towards the European debt crisis although uncertainty about how markets will assess Italy's new austerity plan capped the upside. In Europe, Italy's Prime Minister Mario Monti is set to present his 30 billion euro austerity package to parliament on Monday, as French and German leaders meet in Paris to hammer out a proposal for further fiscal integration across the currency bloc. "On the face of it, the Italy news doesn't seem bad for markets, but Japanese investors need to see the reaction of European and U.S. markets to the plan before they can confirm that it's good news," said Masayoshi Okamoto, head of dealing at Jujiya Securities. "The 30 billion euro amount, is it too much, too little, or just right? We need to see what the market thinks of it," he added. European Union leaders will meet on Thursday and Friday to seek agreement on a convincing rescue plan. The European Central Bank will also hold a regular policy meeting on Thursday and is expected to cut interest rates. "It's difficult for investors to move right now, with volume at such a low levels and even with positive data from the U.S., all the focus remains on Europe and what happens there," said Hideyuki Ishiguro, investment strategy supervisor at Okasan Securities. The Nikkei rose 0.6 percent to 8,695.98, adding to its 6 percent gain last week and jumping above its 25-day moving average of 8,573. The broader Topix also added 0.6 percent to 748.61. Volume was thin, with 1.43 billion shares changing hands on the main board, less than Friday's 1.57 billion shares and down 11 percent from the 20-day average volume. Twice as many shares declined as advancing issues. FINANCIALS LEAD GAINS Strategists said one positive technical sign for the Nikkei is that it is now trading above its 25-day moving average, at 8,563. The index also briefly broke above 8,700 for the first time in nearly a month, reaching an intraday high of 8,704.48 shortly after the open. Battered Japanese financial stocks continued to bounce back as the overall market gained. The securities subindex gained 2.2 percent and was the top performing sector. It has risen about 10 percent since hitting a lifetime low on Nov. 24 but is still down 30 percent since July on low trading volumes and as the European debt crisis prompted investors to flee riskier assets. Nomura Holdings Inc gained 2.8 percent to 262 yen and rival Daiwa Securities Group Inc rose 1.6 percent to 260 yen. Seven Bank Ltd rose 1.3 percent to 155 yen after it said on Friday it plans to list on the Tokyo Stock Exchange on Dec. 26 to broaden its investor base. Olympus Corp, engulfed in an accounting scandal, added 2.3 percent to 1,091 yen ahead of a report by a third-party panel which is expected to be announced on Tuesday. A source said the firm hid up to $1.7 billion in losses from its investors, but added that the report is likely to say there is no evidence of involvement by organised crime in the cover-up. "The important point is whether liabilities exceeded assets during the time they were hiding investment losses," said Okasan's Ishiguro, adding that the stock was trading at its upper limit for now. Another scandal-hit firm, Daio Paper , jumped 8.1 percent to 587 yen on reports that it will file its delayed results on Dec. 14, allowing the tissue paper marker to avoid a delisting from the Tokyo bourse. The tissue maker's former chairman, Mototaka Ikawa, was arrested by prosecutors last month after a third-party investigation found he had diverted 10.6 billion yen ($136 million) from Daio subsidiaries to his own account. MatsumotoKiyoshi Holdings rose 3.6 percent to 1,543 yen after Nomura Securities hiked its recommendation on the drugstore operator to "buy" from "neutral", citing the company's efforts to improve margins at its suburban stores. Fast Retailing Co Ltd jumped 4.5 percent to 13,050 yen after the operator of the Uniqlo clothing chain said on Friday domestic same-store sales in November fell 1 percent from a year earlier, an improvement from a 4 percent drop in October.