* Post-election rally dissipates quickly on strong yen
* Short-covering, strong output data buoyed market earlier
* Shanghai falls below key support, adding pressure
* Support seen holding at 25-day moving average near 10,400 By Elaine Lies and Aiko Hayashi
TOKYO, Aug 31 (Reuters) - The Nikkei average fell on Monday as a stronger yen and tumbling Shanghai stocks helped erase the benchmark's jump to an 11-month high after an opposition election win.
Sunday's landslide victory for Yukio Hatoyama's Democrats ends a half-century of almost unbroken rule by the Liberal Democratic Party and breaks a deadlock in parliament.
Analysts said the market was struggling to interpret the results of the election, with the Nikkei rising by more than 2 percent at one point, falling by over 1 percent later, and turning briefly positive several times after that.
"The market will likely take a wait-and-see approach for about a month after the new government takes power as no one knows where it will take us," said Mitsushige Akino, chief fund manager at Ichiyoshi Investment Management.
"Uncertainty remains on what kinds of policies the Democrats will take and what kind of impact they will have."
The Nikkei lost 0.4 percent or 41.61 points to 10,492.53 after bouncing briefly to an 11-month high of 10,767.00, 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.
It gained 1.3 percent for the month.
The broader Topix fell 0.4 percent to 965.73.
Shanghai shares tumbled 5.6 percent, breaking beneath the key 125-day moving average used by Chinese investors to delineate a bull versus a bear market, amid disappointing corporate earnings and upcoming new share issues.
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.
A poll of 33 traders and analysts in bond, stock and foreign exchange markets showed they expected the Nikkei will rise over the next month. They also forecast it will finish the year at 10,000 and be at 11,000 when the financial year ends in March 2010.
SUPPORT HOLDING
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 for a while.
"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."
Among big stocks losing ground, Daiichi Sankyo slid 2.9 percent to 1,985 yen after some analysts said AstraZeneca's new blood thinner 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.
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 3.3 percent to 3,570 yen and Honda Motor Co shed 1.8 percent to 2,935 yen. Toyota Motor Corp lost 1.2 percent to 3,990 yen.
But CSK Holdings Corp shot up 8.5 percent to 449 yen after the Nikkei business daily reported the firm's lenders are considering plans to give the struggling information services firm a financial aid package of around 30 billion yen.
Shares of Pigeon Corp climbed 2.7 percent to 3,850 yen, trading near their lifetime intraday high, after the baby care products maker lifted its annual operating profit forecast by 7 percent to 4.7 billion yen.
It also got a boost amid hopes that a proposal by the Democratic Party to issue monthly child allowances would bolster the company's sales.
Trade picked up on the Tokyo exchange's first section, with 2.2 billion shares changing hands, above last week's daily average of 1.9 billion.
Declining stocks outnumbered advancing ones, 963 to 585. (Editing by Edwina Gibbs)