* Banks gain after Goldman Sachs upgrade on U.S. peers
* Market gains weak on earnings worries due to yen -analyst
TOKYO, Oct 6 (Reuters) - Japan's Nikkei average inched up 0.2 percent on Tuesday, lifted by banking shares such as Mitsubishi UFJ Financial Group after their U.S. peers rallied following a Goldman Sachs upgrade on the bank sector.
Mazda Motor jumped 6 percent after it said it would raise up to $1.1 billion in a share sale to invest in hybrid and other technologies in what analysts said was a long-overdue bid to close the gap with rivals. It also halved its net loss forecast for the year to March.
High-tech exporters including Tokyo Electron also gained after optimism about upcoming U.S. earnings and strong services sector data boosted Wall Street.
"Although gains are still due to short-covering, Goldman's upward revisions for bank earnings forecasts in the United States are helping bank shares here higher," said Takahiko Murai, general manager of equities at Nozomi Securities.
"But recent strength in the yen is keeping investors from actively buying on dips as the strong yen could force exporters to lower their earnings forecasts for the second half of the business year."
The benchmark Nikkei rose 21.75 points to 9,696.24. It fell 0.6 percent the previous day to book its lowest finish since July 21 at well below its 25-day moving average. Last week, the index shed 5.2 percent, its worst weekly loss in about three months.
The broader Topix added 0.3 percent to 870.07.
U.S. financial stocks rallied, and were the top positive on the S&P 500 index after Goldman Sachs upgraded the large-cap bank sector, saying share prices for companies in the industry didn't reflect their earnings power.
Japan's top bank Mitsubishi UFJ climbed 2.4 percent to 466 yen and Mizuho Financial Group added 2.2 percent to 183 yen.
The yen stood around 89.40 yen to the dollar in early Asia trade. It hit an eight-month high of 88.23 yen to the greenback last week.
Many Japanese exporters have set their exchange rate assumptions for the dollar around 90-95 yen for the current fiscal year to March. A stronger Japanese currency eats into exporters' profits when they are repatriated.
Tokyo Electron gained 2.9 percent to 5,360 yen and Kyocera Corp advanced 1.8 percent to 7,880 yen. Honda Motor Co added 2.1 percent to 2,650 yen.
Mazda climbed to 196 yen. (Reporting by Aiko Hayashi; Editing by Edwina Gibbs)