* Post-election rally dissipates quickly on strong yen
* Short-covering, strong output data buoy market earlier
* Shanghai falls below key support, adding pressure
By Elaine Lies and Aiko Hayashi
TOKYO, Aug 31 (Reuters) - Japan's Nikkei average fell on Monday as a stronger yen sent exporter shares lower and weak Shanghai stocks added additional pressure, erasing an earlier jump to an 11-month high after an opposition election win.
Sunday's landslide victory for Yukio Hatoyama's Democratic Party ends a half-century of almost unbroken rule by the Liberal Democratic Party and breaks a deadlock in parliament.
The Nikkei lost 0.3 percent or 27.38 points to 10,506.76 after bouncing briefly to an 11-month high, led by buying of Nikkei futures that set off short-covering. But it fell back as the yen advanced to a seven-week peak against the dollar and exporters lost ground.
Shanghai shares tumbled 5.4 percent, falling to a three-month low and breaking beneath the key 125-day moving average used by Chinese investors to delineate a bull versus a bear market.
"The election probably had an impact for about the first 30 minutes of trade, when stocks jumped, but then the stronger yen and Shanghai pushed the market lower," said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments.
"Exporters, such as carmakers and tech firms, are very sensitive to the higher yen and even though the market's pretty surely bottomed out, this could still have a bad impact."
Market players said there was little sign of foreign investors -- long a key driver of the Nikkei -- in the market, with some investors selling on the fact the election was over.
"If foreign investors come in decisively in expectations of Democratic policies there's likely to be long-term support," said Kenichi Hirano, operating officer at Tachibana Securities.
For a graphic on foreign net buying of Japanese shares and the Nikkei, see http://r.reuters.com/pup83d
The broader Topix fell 0.4 percent to 965.89. Nikkei September futures fell 0.3 percent to 10,500, reversing course after touching as high as 10,770.
Among big stocks losing ground, Daiichi Sankyo slid 2.2 percent to 2,000 yen after some researchers said AstraZeneca's new blood thinner works could prove a stronger rival to Plavix, the world's second biggest selling drug, than Daiichi Sankyo's and Eli Lilly's recently launched Effient.
Though the Nikkei slid as low as 10,423.90, or just over 1 percent, market players said support held at the 25-day moving average -- which now comes in around 10,400 and is likely to remain as support.
"We had fairly good industrial production data this morning and fundamentally, the overall economic situation is not that bad," said Hideyuki Ishiguro, a supervisor at the investment information section of Okasan Securities.
"Over the longer term, the fact that the uncertainty of the election and the policy deadlock are both gone will be good for the market. Foreign investors are likely to emerge from tomorrow, after they've had time to study the situation."
The dollar fell 0.9 percent to 92.69 yen but was off earlier lows. Investors fret about a stronger yen as it curbs exporters' profits when they are repatriated.
Canon Inc lost 3 percent to 3,580 yen and Honda Motor Co shed 1.7 percent to 2,940 yen. Toyota Motor Corp lost 1 percent to 4,000 yen. (Reporting by Elaine Lies; Editing by Chris Gallagher)