* Nikkei hit by profit-taking after 10-month high
* China limits on overcapacity, stronger yen add pressure
* Eyes on Sunday election, but not a strong factor By Elaine Lies
TOKYO, Aug 27 (Reuters) - Japan's Nikkei stock average fell on profit-taking on Thursday after hitting a 10-month closing high the day before, pressured by a stronger yen and falls in Chinese shares, with trade wary ahead of Sunday's election.
Exporters such as Canon Inc lost ground, while Nippon Steel Corp and other steelmakers slid after China said it would curb overcapacity.
Market players said investors have factored in a big win by Japan's opposition Democratic Party in the Aug. 30 national election and their focus is now shifting to the post-election situation, including who will be the next finance and economy ministers.
"There's a sense of buying fatigue among investors globally and that is leading to profit-taking," said Tsuyoshi Segawa, an equity strategist at Mizuho Securities.
"The external environment that had helped produce gains in the market has started showing signs of waning. The U.S. market could be entering a correction phase and the direction of Chinese stocks remains uncertain."
The benchmark Nikkei pared losses to 1.6 percent or 172.93 points to 10,466.78, after earlier falling as much as 2.2 percent. The broader Topix lost 1.4 percent to 961.64.
The Democrats lead Prime Minister Taro Aso's Liberal Democratic Party in newspaper polls ahead of the election. An opposition victory would end more than five decades of almost continuous rule by the LDP and raise the chances of breaking a stalemate in a divided parliament.
"Though the election is not that much of a factor at this point, nobody wants to buy ahead of it. What we're seeing today is people closing down their long positions to take profits -- after all, the market did reach a 10-month high," said Hideyuki Ishiguro, a supervisor at the investment advisory department of Okasan Securities.
He said, and others agreed, that most investors are probably fairly close to neutral at this point in terms of the positions they hold.
Shanghai shares ended a morning of see-saw trade down 0.4 percent, while the dollar lost 0.6 percent against the yen to 93.68 yen, both of which pressured the Nikkei.
Exporters lost ground, with Canon shedding 2.2 percent to 3,620 yen, Toyota Motor Corp losing 2 percent to 4,030 yen and Panasonic Corp down 1.3 percent at 1,469 yen.
Steel firms slid after China's state council said on Wednesday it would restrict licences for steel and cement production to clamp down on overcapacity.
Nippon Steel shed 1.9 percent to 371 yen, while JFE Holdings Inc lost 3.2 percent to 3,380 yen and Kobe Steel Ltd declined 2.8 percent to 177 yen.
Tokuyama Corp, Japan's biggest polysilicon maker, tumbled 8.2 percent to 670 yen after it said it plans to issue 65 million shares in a public offering and an additional 9 million shares in an overallotment option at the end of September, sparking dilution concerns.
But temporary staffing group Pasona bucked the trend, surging 7.6 percent, or by its daily limit of 5,000 yen, to 70,800 yen after saying on Wednesday that it was appointing Heizo Takenaka, an economist and former Japanese cabinet minister, as chairman of its board. (Additional reporting by Aiko Hayashi; Editing by Chris Gallagher)