* A rise in China stocks, big buy orders lift Nikkei further
* Encouraging U.S. data underlines recovery expectations
* Japan's Aug. 30 election eyed; trade light
By Aiko Hayashi
TOKYO, Aug 26 (Reuters) - Japan's Nikkei stock average rose 1.4 percent to hit its highest close in 10 months on Wednesday after U.S. data strengthened hopes for an economic recovery, but trade was cautious ahead of an Aug. 30 election in Japan.
Toyota Motor Corp gained after a source said it would cut its global production capacity to match lower sales, while NEC Electronics soared 11 percent on a report that it and merger partner Renesas Technology Corp may get $2.1 billion in aid.
The benchmark Nikkei extended gains in the afternoon, encouraged by a rise in Chinese stocks, market players said, with some saying big buy orders in the cash market appeared to have further lifted the index.
"There's no mistake that the economy is on a recovery track from both the macro and micro perspective and the market is in an upward trend," said Junichi Misawa, senior fund manager at STB Asset Management.
Latest upbeat data included the Conference Board's August index of consumer confidence that topped economists' forecasts, while the S&P/Case-Shiller home price index rose for a second consecutive month in June, suggesting improvement in two sectors crucial for a U.S. recovery.
"But investors can't aggressively keep pushing the market higher because of uncertainty about exit strategies (from unusual policy measures world governments have taken) and because Japan is highly likely to have a change in the government," Misawa said.
In light trade, the benchmark Nikkei gained 142.35 points to 10,639.71, its highest close since Oct. 3.
The broader Topix added 1.1 percent to 975.59.
Analysts said domestic investors were reluctant to actively take positions ahead of the result of Sunday's election, which many expect Japan's opposition Democratic Party to win. But some say the election is already a neutral trading factor.
Opinion polls show the main opposition Democratic Party of Japan set for a sweeping victory on Sunday that would end more than 50 years of almost unbroken rule by the conservative Liberal Democratic Party (LDP).
A solid win for the Democrats would raise the chances of clearing a policy deadlock in parliament, where the opposition controls the upper house.
Foreign investors have been net buyers of Japanese stocks each week for the last month or so, and market analysts say their interest may grow even more if the Democrats win.
TOYOTA, NEC ELEC ADVANCE
Exporters, which had weighed on the Tokyo market on Tuesday, rose on short-covering, with TDK Corp up 1.5 percent to 5,560 yen and Kyocera Corp climbing 1.7 percent to 7,730 yen.
Toyota rose 1.5 percent to 4,110 yen after the Nikkei business daily said the automaker would cut its annual global production capacity by 10 percent, or 1 million vehicles, and return to an operating profit in the 2010 financial year.
But the source said the extent and timing of the production cuts had not yet been set.
"The idling of plants had been a negative factor for Toyota, so the fact they're moving to tackle this should be evaluated favourably," said Yumi Nishimura, deputy general manager of the investment advisory section of Daiwa Securities SMBC.
NEC Electronics soared 11.4 percent to 980 yen.
Mobile phone operator Softbank jumped 4.7 percent to 2,115 yen after Nikko Citigroup raised its target price and changed its risk rating on the company to "medium risk" from "speculative" while reiterating its "hold" rating.
Mitsubishi Heavy Industries Ltd, Japan's biggest heavy machinery company, extended gains to 4.9 percent or 389 yen after saying it aims to start mass production of lithium-ion batteries for industrial use in late 2012.
Some 2 billion shares changed hands on the Tokyo exchange's first section, slightly below last week's daily average of 2.1 billion.
Advancing stocks beat declining ones by more than 5 to 1. (Additional reporting by Elaine Lies; Editing by Edwina Gibbs)