* Banks weigh on Nikkei after minister's lending comments
* Positive U.S., Japan data gives boost to sentiment
* Trading firms gain after metals, oil climb
* Sony up on brokerage upgrade
By Elaine Lies
TOKYO, Sept 17 (Reuters) - Japan's Nikkei stock average rose 1.7 percent on Thursday, buoyed by exporters after positive U.S. data strengthened recovery optimism and steelmakers on hope of rising demand, though banking shares weighed on the market.
Mitsubishi UFJ Financial Group, Japan's largest bank, lost nearly 2 percent and other banks fell after comments on lending by Shizuka Kamei, the new minister for banking and market regulation who is seen as an opponent of market-friendly reforms.
Kamei said he would like to introduce a moratorium on some loan repayments to help small and midsize businesses and individuals struggling from the economic downturn.
"Basically, the issue is banks," said Nagayuki Yamagishi, a strategist at Mitsubishi UFJ Securities.
"Otherwise, the current level is really just about right for the Nikkei at this point. Much higher, and it would start to seem overbought; much lower, and it would be oversold."
Other market players, though, said they thought Kamei's remarks may have been given too much weight.
"I think there may have been a bit of an over-reaction, though it's true he's a person the financial industry doesn't really welcome," said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments.
"After all, it seems pretty unlikely he'll really be able to carry out the things he's been saying."
The benchmark Nikkei gained 173.03 points in a late surge to close at the day's high of 10,443.80 in moderate trade, a one-week closing high. The broader Topix rose 0.9 percent to 939.52.
U.S. industrial output rose for a second consecutive month in August, while a government report showed a bigger-than-expected drop in crude inventories last week, indicating higher demand. Both helped push Wall Street to 2009 highs.
A government survey showing that big manufacturers had turned optimistic in the three months to September as well as a mostly smooth start for Japan's new government were also lending support to market sentiment, market players said.
SENTIMENT, YEN
A Reuters Tankan survey also showed improvement in manufacturers' sentiment, with an index measuring their mood climbing to a one-year high.
"There's a global trend towards rising stocks and the Nikkei has been riding this wave higher today. Also, it's benefitting from the dollar rising above 91 yen again," said Noritsugu Hirakawa, a strategist at Okasan Securities.
"But you have to realise that the yen is still pretty strong for us to think that 91 yen is good news."
The dollar gained 0.2 percent to 91.07 yen after hitting a seven-month low of 90.12 yen on Wednesday.
Toyota Motor Corp added 1.9 percent to 3,780 yen, while industrial robot maker Fanuc Ltd gained 3.4 percent to 7,950 yen and chip-tester maker Advantest Corp jumped 5.2 percent to 2,410 yen.
Sony climbed 2.4 percent to 2,535 yen after Mitsubishi UFJ Securities raised its rating on the electronics maker to "1" from "3" while setting a 3,200 yen target price.
It cited expectations for an earnings rebound in the next business year to March 2011 thanks to a return to profitability in its LCD TV, games and mobile phone operations.
Mitsubishi Corp and other trading houses climbed after metals and oil gained, with spot gold edging near to the 18-month high of $1,020.50 an ounce hit on Wednesday and oil steady above $72 a barrel. Shanghai copper rose as well, chasing a surge the previous day.
Mitsubishi gained 2.8 percent to 1,980 yen, Mitsui & Co rose 3.2 percent to 1,251 yen and Marubeni Corp rose 2.1 percent to 479 yen.
JFE Holdings climbed to extend the previous day's gains after the Nikkei business daily said a plant of its JFE Steel unit in Kawasaki, near Tokyo, could be restarted as early as next month, hinting at a recovery in demand.
JFE Holdings rose 5 percent to 3,390 yen, Nippon Steel rose 4.1 percent to 353 yen and Kobe Steel gained 3.1 percent to 167 yen. The iron and steel subindex rose 3.8 percent to become the biggest gainer among the subindexes.
But these gains were countered by weak bank shares, with Mitsubishi UFJ down 1.9 percent at 516 yen and No. 3 bank Sumitomo Mitsui Financial Group losing 5.6 percent to 3,360 yen. Mizuho Financial Group fell 1.5 percent to 192 yen.
Trade was moderate on the Tokyo exchange's first section, with 2 billion shares changing hands, in line with last week's daily average.
Advancing stocks outnumbered declining ones by more than 2 to 1. (Reporting by Elaine Lies; Editing by Chris Gallagher)