* Investors cautious ahead of U.S. data
* Upbeat mood intact, but market pauses after rally
* Hitachi jumps on report of lithium ion batteries
By Aiko Hayashi
TOKYO, July 2 (Reuters) - Japan's Nikkei average fell 0.6 percent on Thursday, dented by a fall in blue-chip shares as caution set in ahead of U.S. jobs data, but Hitachi jumped on a report it will boost production of lithium ion batteries for hybrid cars.
Market analysts said the Nikkei was due for a pause after recovering some 40 percent from its March lows, though the mood remained upbeat, reinforced by reassuring manufacturing data from Europe, China and the United States.
"The market is at a standstill right now after overshooting recently and as it's just under 10,000. It will likely spend July and August -- the summer months when trade is thin -- consolidating around the 10,000 level," said Fumiyuki Nakanishi, manager at SMBC Friend Securities.
The benchmark Nikkei closed down 63.78 points at 9,876.15. On Wednesday, it briefly touched its highest in about two weeks above 10,000 before ending the day slightly lower.
The broader Topix slipped 0.5 percent to 924.02.
"The overly optimistic view on the economy has been modified and that is prompting investors to adjust positions in blue-chip stocks. For further gains, the market needs to see more improvement in the fundamentals of the economy," said Takahiko Murai, general manager of equities at Nozomi Securities.
"Still, environment-related stocks such as battery makers are faring pretty well as they are the flavour of the month."
The U.S. employment report, due on Thursday as U.S. markets will be shut on Friday for the Independence Day holiday, is expected to depict an economy still wallowing in recession but it will likely confirm the pace of job losses has slowed.
The Dow Jones industrial average rose 0.7 percent on Wednesday. Surveys from Europe showed manufacturing was shrinking less than initially thought and in China's case, growing modestly, while other data showed the U.S. manufacturing sector contracted in June but at a slower pace than in May.
BLUE-CHIPS WEIGH
Canon Inc shed 1.9 percent to 3,070 yen and electronics parts maker TDK Corp fell 1.6 percent to 4,460 yen. Honda Motor Co slid 2.3 percent to 2,585 yen, the top drag on the Nikkei 225.
But Hitachi climbed 3 percent to 307 yen after the Nikkei business daily reported the company plans to boost production capacity for lithium ion batteries for hybrid cars, targeting a 70-fold increase by 2015.
GS Yuasa Corp, a car battery maker, gained 3 percent to 860 yen.
Steelmakers climbed after Goldman Sachs said April-June, the first quarter of Japan's financial year, is likely to be the worst of the year for them in terms of earnings and it expects some of them to almost break even in the second quarter, partly because steel production has started to pick up.
Shares of Kobe Steel jumped 3.9 percent to 185 yen, while JFE Holdings advanced 1.3 percent to 3,240 yen.
Bridgestone Corp climbed 3.7 percent to 1,574 yen after Merrill Lynch initiated coverage of Japan's largest tyre maker with a "buy" rating and a target price of 2,000 yen.
"We expect a sharp earnings recovery in July-December 2009," the brokerage wrote in a note to clients.
"At this time, Bridgestone should be benefiting fully from the drop in raw materials prices, and we expect passenger car tire demand to recover from July-September, and truck/business tire demand from October-December."
Trade was moderate on the Tokyo exchange's first section with 2.1 billion shares changing hands, in line with last week's daily average.
Declining shares outnumbered advancing ones by 927 to 647. (Editing by Chris Gallagher)