* Selling of futures leads benchmark Nikkei down
* Late Shanghai tumble hits investor sentiment
* Sanyo surges on Toyota battery use report
* Autos, Canon up after brokerage upgrades
By Elaine Lies
TOKYO, Aug 19 (Reuters) - Japan's Nikkei stock average fell to a three-week closing low on Wednesday, hit by late sales in futures that dragged the cash market down, along with a slide in Chinese stocks that damaged already shaky investor sentiment.
High-tech exporters such as Kyocera Corp lost ground with chip-linked shares that rose in morning trade, but this was countered by a surge in Sanyo Electric Co and gains by auto shares.
Sanyo soared as much as 17 percent to a near two-month high after a source familiar with the matter said Toyota Motor Corp would buy batteries for hybrid cars from Sanyo to keep pace with growing demand for cleaner vehicles.
Shares in firms that produce medical masks and the fabrics to make them climbed after a third death from the H1N1 flu in Japan.
"The stock market has progressed upwards very steadily, and whether this is just a pause or we're entering a correction is still very hard to read, especially with uncertainty lingering about Chinese shares," said Takashi Ushio, head of the investment strategy division at Marusan Securities.
"So this situation all makes it very hard to buy."
The benchmark Nikkei fell 0.8 percent or 80.96 points to 10,204.00, its lowest close since late July. The broader Topix shed 0.7 percent to 943.25.
Analysts said the signals were mixed, making investors wary.
U.S. government data showed construction starts for single-family dwellings, the worst-hit part of the housing market, rose 1.7 percent in July from June to an annual rate of 490,000 dwellings -- the highest since October.
But a 13.3 percent drop in new multifamily home projects pushed overall housing starts down 1 percent to an annual rate of 581,000 dwellings after two months of gains. Shares in Shanghai shed 2.6 percent in volatile trade after falling over 3 percent at one point, increasing investor jitters after a sharp Monday slide.
"There's a slight bias towards optimism among investors, but optimists and pessimists are nearly evenly divided, and none of the optimists are really gung-ho," said Masayoshi Okamoto, head of dealing at Jujiya Securities.
"Nobody's really moving their portfolios -- they're either hedging in futures or in ETFs (exchange-traded funds)."
Analysts also said that some investors were wary of active trade ahead of Japan's August 30 election. The opposition Democratic Party currently leads Prime Minister Taro Aso's Liberal Democratic Party in newspaper polls.
"People do seem to be holding back from buying a bit on the election. But I'd say that China's still a bigger uncertainty," said Hideyuki Ishiguro, a supervisor in the investment advisory department of Okasan Securities.
SANYO SURGE
Sanyo shares were up 10.3 percent at 247 yen, after hitting their highest since June 29.
Toyota, the world's biggest automaker, will first use Sanyo's lithium-ion batteries from around 2011, said the source, who spoke on condition of anonymity.
Analysts said that while the news is likely to be crucial for Sanyo's positioning in the rechargeable battery market, the stock itself was probably now overbought.
"There's a lot of expectation about the company's rechargeable and solar cell business, but at the current price it's hard to imagine that any institutional investors would be buying," said Osamu Hirose, an analyst at Tokai Tokyo Research Center.
Toyota and other automakers rose after Nomura Securities raised its investment stance on the sector to "bullish" from "neutral", although they shed much of their gains by the close.
Nomura cited improvement in company performance in the first quarter, hopes for recovery in demand due to government support measures, and a growing possibility that companies may raise their forecasts.
Toyota edged up 0.3 percent to 4,050 yen, Honda Motor Co rose 2 percent to 3,070 yen and Mazda Motor Co gained 1.2 percent to 260 yen.
Canon climbed 1.2 percent to 3,400 yen after Goldman Sachs upgraded the company to "buy" from "neutral" and added it to its conviction list, citing expectations for a strong rebound in laser beam printer shipments and resilient demand for digital cameras.
Japan's health ministry said the H1N1 flu had reached epidemic proportions in Japan.
Shikibo shot up 26 percent to 260 yen, Unitika rose 6.8 percent to 94 yen, Daiwabo Holdings gained 6.6 percent to 466 yen and Fujibo Holdings rose 6.2 percent to 172 yen.
Trade picked up slightly, with 2.2 billion shares changing hands, compared with last week's daily average of 1.9 billion.
Declining stocks outnumbered advancing ones by more than 2 to 1. (Additional reporting by Tokyo newsroom; Editing by Joseph Radford)