* Nikkei buoyed by U.S. stock gains, economic optimism
* Deal to rescue CIT group relieves financial system worry
* Eyes on Japan election, but stock impact limited for now
* Resistance strong near 25-day moving average around 9,600
By Elaine Lies
TOKYO, July 21 (Reuters) - Japan's Nikkei stock average climbed 1.4 percent as optimism about a U.S. economic recovery grew, reviving investor appetite for riskier assets, with blue-chip exporters such as Canon Inc gaining. Itochu Corp and other trading houses advanced on rising metals prices and firm oil, but trade was light as investors turned their attention to politics.
Japanese cabinet members signed off on Prime Minister Taro Aso's plan to dissolve parliament's lower house on Tuesday for an election expected on Aug. 30.
Market analysts said investors were watching political developments, but that they were unlikely to be a strong trading factor for the day, although a slight jump could come after parliament is actually dissolved.
"Now we will have 40 days of a political vacuum, and overseas investors may not like this very much. They tend to be scared off by political instability," said Noritsugu Hirakawa, a strategist at Okasan Securities.
"I think that for the short-term, hopes that the Democrats will take power and cure the parliamentary paralysis, leading to the smooth passage of bills and policies, will outweigh any worries about uncertainty."
But he added that over the longer term, worries about how the Democrats would fund their proposed social programmes could weigh on the market. Most of the Nikkei's gains came as it moved to play catch-up after a Monday holiday.
U.S. stocks jumped on Monday, with the S&P 500 hitting an eight-month closing high, after CIT Group Inc, a lender to nearly a million small and mid-sized U.S. companies, reached a deal with bondholders for $3 billion in emergency financing.
"The situation with CIT has eased market worries about financial instability and increased hopes of economic recovery, leading to a revival of risk appetite," said Hiroichi Nishi, general manager at the equity division of Nikko Cordial Securities.
The benchmark Nikkei rose 126.94 points to 9,522.26 after rising as far as 9,588.77, while the broader Topix gained 1.7 percent to 893.02.
Strong resistance for the Nikkei is seen just above 9,600, which is where its 25-day moving average --- the often-quoted Japanese proxy for a trading month -- comes in.
"If and when we do break above it, though, this is likely to become support, with a spate of buying sending the Nikkei higher, perhaps quickly," said Nagayuki Yamagishi, a strategist at Mitsubishi UFJ Securities.
EXPORTERS, CHINA, TRADERS
Exporters rose broadly on optimism for the U.S. economy, with Canon up 1.6 percent to 3,140 yen, Panasonic Corp climbing 3.6 percent to 1,250 yen and Sony Corp advancing 1.3 percent to 2,295 yen. Toyota Motor Corp, the world's biggest automaker, was up 1.7 percent at 3,570 yen.
Toyota North America is reworking its U.S. manufacturing strategy to account for idle capacity and shifting corporate priorities, the president of the unit told reporters on Monday.
China-linked shares, especially construction machinery makers, also performed strongly after expectations of economic recovery there were fed by last week's announcement of 7.9 percent economic growth for the second quarter, beating expectations.
Hitachi Construction Machinery climbed 5.4 percent to 1,536 yen, Komatsu rose 4.3 percent to 1,470 yen and Kubota Corp gained 4.3 percent to 783 yen.
Strong metals prices sent trading houses climbing.
Itochu Corp shot up 5 percent to 670 yen and Mitsubishi Corp gained 4.7 percent to 1,780 yen, with expectations of a China recovery buoying these shares as well.
Trade slowed on the Tokyo exchange's first section, with 941 million shares changing hands, compared with last week's morning average of 1 billion.
Advancing shares outpaced declining ones by more than 7 to 1. (Reporting by Elaine Lies; Editing by Joseph Radford)