TOKYO, March 7 (Reuters) - Japan's Nikkei average is set to hand back some of last week's gains on Monday as fears of more turmoil in the Middle East and higher oil prices are likely to overshadow solid U.S. payroll data.
The resignation of Japanese Foreign Minister Seiji Maehara on Sunday to take responsibility for accepting donations from a foreign national, adds to unpopular Prime Minister Naoto Kan's troubles but is not expected to have a big immediate impact on the market.
"With strong, but not spectacular U.S. payrolls we're seeing more signs of global recovery, but in the long term, high oil prices can threaten the earnings of Japanese companies and that's what investors are concentrating on now," said Mitsuo Shimizu, deputy general manager at Cosmo Securities.
"Maehara's decisions will have no immediate impact on the market, and it's hard to see how Prime Minister Kan could call a snap election with local elections coming up in April," he said.
Worries about Middle East tensions grew with the intensifying conflict in Libya over the weekend, a return of protestors to the streets of Egypt, and the banning of protests in Saudi Arabia, the world's top oil exporter.
Oil prices climbed to their highest in more than two years, while gold, a traditional safe haven, rose 1 percent to near record-highs on Friday.
Nikkei futures also point to a lower start. They last traded in Chicago at 10,650, 0.5 percent below their closing level in Osaka.
Analysts said the Nikkei is expected to trade between 10,550 and 10,650 and the benchmark's immediate support looms around its 25-day moving average of 10,597.90.
A decisive break below 10,550 may trigger aggressive selling in futures, pushing the benchmark down further, traders said.
The benchmark Nikkei added 1.6 percent last week, gaining 1 percent or 107.64 points to 10,693.66 on Friday. It has gained over 16 percent since November, outperforming other Asian markets.
Market participants said euro-sensitive exporters such as precision equipment makers like Nikon Corp and Canon Inc, glassmakers, as well as carmaker Mazda Motor may continue to outperform the overall market as the euro held on to its huge Friday gains against the yen on expectations interest rates in the euro zone will rise as early as next month.
But bank shares may struggle after Bank of America Merrill Lynch downgraded shares of Citigroup Inc and Goldman Sachs Group Inc to "neutral" from "buy", sending their shares lower, on expectations of subdued client activity and geo-political risks to weigh on the first-quarter earnings of large U.S. banks.
Unemployment in the world's largest economy fell below 9 percent for the first time in nearly two years, U.S. government data showed on Friday..
STOCKS TO WATCH
-- Toyota Motor Corp
Toyota plans to raise its output in Thailand by 10 percent to about 700,000 vehicles in 2011 from a year earlier, Japan's Sankei newspaper reported on Saturday, citing unnamed sources.
The world's largest automaker plans to add more engineers to its payroll by expanding recruitment for the first time in three years as competition intensifies in the development of green vehicles, the Nikkei business daily reported on Saturday.
It intends to hire 1,300 to 1,400 workers in fiscal 2011, up about 10 percent from the current fiscal year, the paper said..
-- Sony Corp
Sony said it will appeal the seizure of Playstation 3 game consoles by customs officers in the Netherlands following a court injunction initiated by LG Electronics over a patent dispute. (Reporting by Antoni Slodkowski; Editing by Edwina Gibbs)