* BOJ ETF purchases lending support to market -analyst
* Foreign buying weaker as nuclear outcome, fundamentals unclear-analyst
* Electric and gas, banking shares down on nuclear woes
* Hitachi surges on plant restart
By Antoni Slodkowski
TOKYO, March 30 (Reuters) - Japan's Nikkei stock average climbed 2.6 percent, hitting its highest level since a post-quake panic sell-off as the yen softened against the dollar, but investors said the gains may be short-lived as bargain-hunting by foreigners peters out.
Market players also said the Bank of Japan's purchases of exchange-traded funds under an asset purchase programme adopted to bolster the economy was lending some support to the market ahead of the business year-end on Thursday.
Inflows from passive funds and year-end window dressing by institutional investors were also cited as reasons that pushed the Nikkei considerably higher in afternoon trade.
But now that the benchmark has regained more than half of the ground it lost in the post-quake rout, foreign funds are buying less aggressively.
"Foreigners have stopped piling into shares on dips, and are now mostly sidelined, waiting for more information on fundamentals and further developments at the nuclear plant," said Hideyuki Ishiguro, a supervisor at Okasan Securities in Tokyo.
The Nikkei ended the day up 2.6 percent, or 249.71 points, to 9,708.79. The broader Topix index advanced 1.9 percent to 866.09.
A stronger dollar lifted machinery stocks, electronics makers and post-quake underperformers like Nissan Motor , which jumped 3.8 percent. Nissan has fallen more than 10.4 percent since the earthquake and tsunami hit northeast Japan more than two weeks ago.
Both Nissan and Toyota Motor Corp , which have lost a substantial amount of domestic production due to disruptions in their supply chains, were among the most actively traded shares by turnover on the Tokyo stock exchange's main board.
Tokyo Electric Power dropped another 18 percent, adding to a slide to a 47-year low a day earlier as the government pondered whether to nationalise the operator of a stricken nuclear plant.[ID:nL3E7EU01N]
"We believe the stock could go to zero," an executive at a hedge fund with $1 billion invested in Asia told Reuters on condition he was not identified. His fund he said has been buying Tokyo Electric's debt because "we think the Japanese government will guarantee or nationalise it".
The utility's credit default swaps have fallen sharply in the past few days, having hit a record high around 475 basis points on Monday. Still, the cost of insuring its debt against default is around 378 , compared to 40 basis points before the quake.
BANKS LOSE
Banking stocks also felt Tokyo Electric's pain, slumping on worries about their loans to the company.
"You have to look at all the banks that are lending to the company. It's obvious that investors are going to look at their situation with a huge dose of scepticism," said Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities.
The banking sector , down 12.3 percent since the quake, was the second weakest performer on Wednesday, losing 0.6 percent. Mizuho Financial Group , also facing an inspection by financial authorities after it suffered computer system troubles, fell 2.1 percent to 137 yen.
Japanese shares have shed about 7 percent since the March 11 earthquake and tsunami, and a subsequent nuclear safety crisis, triggered the biggest two-day rout in the market since 1987. In contrast, the MSCI index of Asian shares outside Japan has gained 4.7 percent.
Domestic fund managers warned the Nikkei faced more downside risk around May.
"This is when firms will publish their earnings forecasts which will seriously sour the market's mood," said Hiroaki Osakabe, a fund manager at Chibagin Asset Management.
"Analysts may put out reports beforehand, but it will be very hard to fully rely on them and price in the quake damage, so the potential declines could be very big."
The dollar rose as a steady rise in U.S. yields gained traction this week after several Federal Reserve policymakers said the central bank would have to start tightening monetary policy soon to avoid inflation.
Shares of Hitachi Ltd , soared 8.7 percent to 437 yen in heavy trade after the electronics giant had partially resumed operations at its biggest factory complex with output expected to return to pre-disaster levels next month. (Additional reporting by Natsuko Waki and Chikafumi Hodo; Editing by Edwina Gibbs and Edmund Klamann) Reuters Terminal users can see other related news and rates by double-clicking on: All Nikkei indices <0#.NIKKEI> All shares listed on The benchmark Nikkei ended the day up 1.1 percent or 101.12 points at 9,536.13, Nikkei-225 <0#.N225> N225 index TOPIX index Nikkei Japan 1000 TOPIX sector data Nikkei 300 index TOPIX futures data <0#JTI:> Osaka N225 data <0#JNI:> Chicago N225 data <0#NK:> Top 30 by volume Top 30 by value Total volume Total value 1st section sector RICs All TSE weighted avg Top 30 gainers by pct Top 30 losers by pct Top 30 net gainers Top 30 net losers
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