* Better-than-expected U.S. and Japan data buoy confidence
* Nikkei above 10,500, but some warn pace of gains rapid
* M'bishi Rayon soars on merger report with M'bishi Chem
By Aiko Hayashi
TOKYO, Aug 10 (Reuters) - Japan's Nikkei average hit its highest point in 10 months on Monday after better-than-expected Japanese and U.S. data underpinned hopes that both economies are on the mend, with exporters also gaining on a weaker yen.
Resin maker Mitsubishi Rayon gained a fifth in value after the Nikkei business daily said Mitsubishi Chemical, Japan's top chemical firm, is in talks to acquire it in a deal worth up to 200 billion yen ($2.1 billion). Mitsubishi Chemical gained 5 percent.
Komatsu Ltd and other machinery makers climbed after data showing machinery orders, a leading indicator of capital spending, rose in June for the first time in four months, though Japanese manufacturers forecast a sixth straight quarterly fall in orders in July-September.
The data came on the heels of a drop in the U.S. unemployment rate in July, the first in 15 months as employers cut fewer-than-expected jobs.
Market participants said the latest upbeat data reinforced investor optimism about economic recoveries in Japan and the United States, which has helped the benchmark Nikkei recoup about 50 percent from a trough marked in March.
"The trend for the market now appears to be to keep going up little by little, as investors have strong hopes for the economic recovery," said Naoki Koga, senior fund manager at Toyota Asset Management.
"But the pace of gains has been rapid, and I feel more and more investors are leaning toward taking a wait-and-see position. If disappointing news were to emerge, such as poor economic data or downward revisions to earnings, the market could stumble."
The benchmark Nikkei rose 1 percent or 98.57 points to 10,510.66, after earlier climbing as far as 10,585.37, its highest point since Oct. 6.
The broader Topix added 1.2 percent to 967.76.
With the Nikkei breaking above 10,500, analysts said its next target is likely to be 10,800 -- a level it last saw in October and a 50 percent Fibonacci retracement from its June 2008 high and last October's 26-year low just under 7,000.
For further gains, market players said they still need to see more evidence of the economic recovery.
"We really need to start getting some positive macroeconomic outlooks for this quarter and then the latter half of the year, and I think market attention is turning to this," said Masayoshi Okamoto, head of dealing at Jujiya Securities. "If people were really confident we'd be rapidly heading up to 11,000 or 12,000. As it is, 10,700 looks tough for now."
MITSUBISHI RAYON STRONG
Mitsubishi Rayon powered 21.3 percent higher to 331 yen, while Mitsubishi Chemical jumped to 444 yen.
The Nikkei report also said the two companies are likely to agree on a deal as early as this autumn and plan to complete the transaction in spring next year. They do not currently have capital ties.
"The deal would give them a chance to focus on high-end, high-performance resins and distance themselves from fierce price competition in basic petrochemical products," said Nobuhito Owaki, analyst at J.P.Morgan Securities.
Komatsu, the world's second-largest maker of construction machinery, gained 2.6 percent to 1,627 yen and Hitachi Construction Machinery Co rose 2.7 percent to 1,759 yen.
Exporters got an extra boost from a weaker yen, with the U.S. dollar staying above 97 yen, retaining broad gains made on Friday after the U.S. jobs data. A weaker yen helps boost exporters' profits when they are repatriated.
Honda Motor Corp advanced 3.9 percent to 3,220 yen, Canon Inc rose 2.4 percent to 3,490 yen and Sony Corp advanced 3 percent to 2,775 yen.
Bridgestone, Japan's top tyre maker, shot up 5.5 percent to 1,783 yen after it raised its full-year outlook again after a surprise upgrade in June, citing costs cuts. (Additional reporting by Elaine Lies and Kiyoshi Takenaka; Editing by Edwina Gibbs)