* Nikkei rises above 10,000 before retreating
* Steel shares strong on ratings hike
* Worry about U.S. interest rates weighs
* Nikkei now above 52-week moving average
By Aiko Hayashi
TOKYO, June 11 (Reuters) - The Nikkei average briefly edged above 10,000 to an eight-month high on Thursday before slipping 0.1 percent on the day, with worries about rising U.S. interest rates offsetting a jump in steel shares on a brokerage upgrade.
Nippon Steel Corp shot up nearly 6 percent after Morgan Stanley lifted its rating on the sector to "attractive" from "in-line", saying it was time to shift to an aggressive investment stance as uncertainties surrounding the sector have started to be resolved.
But market analysts said rising U.S. interest rates weighed on investors' confidence to limit further gains as they could put a damper on consumer and business spending.
Japanese government bond prices fell on Thursday with the 10-year yield rising to its highest level since late October.
The benchmark U.S. Treasury yield climbed to an eight-month high the previous day, sending Wall Street lower as higher yields act as a benchmark for many lending rates.
"Generally speaking, the upward trend in the stock market is continuing as economic stimulus measures taken by governments around the world are still having an impact," said Takashi Kamiya, chief economist at T&D Asset Management.
"But rising U.S. rates pose a huge concern to the stock market. Higher interest rates will dampen an economic recovery and they would make bonds more attractive to investors, compared to stocks."
In active trade, the benchmark Nikkei inched down 10.16 points to 9,981.33, after rising as high as 10,022.23 in morning trade, its highest since Oct. 7 and up roughly 43 percent from its March bear market low.
The broader Topix rose 0.4 percent to 940.65.
Investors also turned cautious ahead of a U.S. government report on May retail sales due later in the day and the settlement of Nikkei futures and options on Friday.
As of Wednesday's close, the Dow Jones industrial average had risen some 35 percent and the S&P 500 some 41 percent from their March lows.
The Nikkei climbed this week above its 52-week moving average, now around 9,800, but analysts say it needs to break above 10,500 to enter a bull market.
The 10,500-10,800 range has provided strong support and resistance in the past, most notably in late 2003 to 2004, and is also significant because 10,800 is a 50 percent retracement from last year's closing high of 14,489 to the March closing trough of 7,054.
Japan's economy contracted 3.8 percent in the first three months of this year, revised figures showed, better than economists' median forecast, though the market largely shrugged it off.
The mood on the streets of Tokyo remained cautious, despite the Nikkei's brief rise above 10,000.
Yukari Tani, a 32-year-old cosmetics sales clerk, shrugged off the Nikkei's spike.
"There's nothing around me that makes me feel the economy is turning around," Tani said.
"A lot of my friends are switching jobs lately and I heard many of their companies were offering early retirement."
STEEL SOLID, BUT PROFIT-TAKING WEIGHS
Steel stocks held onto gains made after Morgan Stanley lifted its rating on the sector. The brokerage also raised its rating on Nippon Steel to "overweight" from "equal-weight" and hiked the company's target price to 480 yen from 270 yen.
Nippon Steel jumped 5.7 percent to 393 yen, while JFE Holdings Inc climbed 3.7 percent to 3,350 yen and Kobe Steel Ltd advanced 6 percent to 195 yen.
Olympus Corp soared 13.2 percent to 2,365 yen after Deutsche Securities doubled its target price for the maker of digital cameras and medical devices to 3,230 yen on cost cuts and brisk endoscope sales.
Shares of electronics group Toshiba shot up 8.2 percent to 384 yen after Nomura Securities lifted its rating on the stock to "buy" from "neutral", and raised its target price to 560 yen from 320 yen.
Nomura said investors' focus on the company will likely shift to its global growth potential.
But selling among a broad swathe of shares, including index heavyweights such as Honda Motor Corp and other exporters, weighed on the Nikkei average as profit-taking emerged after recent gains and amid worries about U.S. interest rates.
Honda lost 1.4 percent to 2,845 yen, while TDK Corp fell 0.9 percent to 4,400 yen and Sony Corp shed 0.9 percent to 2,675 yen.
Some 3 billion shares changed hands on the Tokyo exchange's first section, above last week's daily average of 2.4 billion.
Advancing stocks outnumbered declining ones 809 to 758. (Editing by Michael Watson)