* BOJ tankan: Big manufacturers' index at +5 vs forecast +3
* Sentiment worsens for 1st time in 7 quarters, outlook weak
* Big firms forecast modest growth in FY2010/11 capex
* No big negative surprise, BOJ seen standing pat for now (Adds graphic, details)
By Leika Kihara and Rie Ishiguro
TOKYO, Dec 15 (Reuters) - Japanese manufacturers' business sentiment worsened for the first time in nearly two years this quarter but the gloom was not as severe as expected, giving the Bank of Japan breathing room before pondering its next move.
But big manufacturers expect conditions to deteriorate over the next three months, the BOJ's closely watched tankan survey showed on Wednesday, keeping up pressure on the central bank to support the fragile economy with its ultra-easy monetary policy.
"The figures show the economic recovery is in line with the BOJ's scenario, in that a slowdown is one-time and a recovery will resume next year," said Akiyoshi Takumori, chief economist at Sumitomo Mitsui Asset Management.
"One trigger for further BOJ monetary easing would be for the economy to show signs of deterioration, such as negative growth in GDP for the January-March quarter."
The headline index measuring big manufacturers' sentiment fell to plus 5 from September's plus 8, marking the first decline in seven quarters. But it exceeded a median market forecast of plus 3.
The index for March next year was seen at minus 2, showing that the murky economic outlook was making companies cautious about business conditions in the coming three months.
BOJ policymakers are expected to scrutinise the tankan at their rate review next week, although the central bank is seen holding off on easing monetary policy further after having taken action in October.
"The BOJ is likely to stick with its current status for a while," said Yoshiki Shinke, senior economist at Dai-ichi Life Research Institute.
"Rather than economic indexes, the trigger is likely to come from the market, such as stocks falling greatly or the yen strengthening even more due to overseas events."
MURKY OUTLOOK
Financial markets were swayed more by Federal Reserve policy than the tankan. The benchmark 10-year Japanese government bond yield hit a seven-month high of 1.295 percent on Wednesday, tracking gains in U.S. Treasury yields after the U.S. central bank showed no signs of curtailing its stimulus measures.
The pain from the yen's surge to a 15-year high against the dollar in November was evident with big manufactures, many of which are reliant on exports, cutting their dollar/yen forecasts and profit estimates for the latter half of fiscal 2010/11.
Still, corporate capital spending held up relatively well and some analysts said the damage was contained by solid demand for Japanese goods in fast-growing Asia.
"Big manufacturers are cautious about the outlook as the economy is likely to be in a lull in the first half of next year, but their profits have stayed firm probably because solid demand from emerging economies offset the negative impact of the yen's rise," said Yoshimasa Maruyama, an economist at Japanese trading house Itochu Corp.
Big firms plan to increase capital spending by 2.9 percent in the year to March 2011, slightly more than a median forecast for a 2.7 percent rise and recovering from a 15.5 percent decline in the year ended in March.
Japan's economy is expected to have contracted slightly in the October-December quarter on slowing overseas growth and slumping factory output after the September expiry of government incentives for purchases of low-emission cars.
Analysts expect the country's economic growth to pick up early next year with support from exports to fast-growing Asia, but only modestly.
The BOJ has pledged to keep interest rates effectively at zero until the end of deflation is in sight and rolled out a 5 trillion yen ($60 billion) pool of funds to buy assets ranging from government bonds to corporate debt.
The central bank has said topping up the fund is a strong option if the economy worsens more than expected but it does not want to do so too soon.
The tankan's sentiment indexes are derived by subtracting the percentage of respondents who say conditions are poor from those who say they are good. Positive readings mean optimists outnumber pessimists. ($1=83.60 Yen) (Editing by Edmund Klamann)