* Japan manuf sentiment edges up, service-sector mood down
* Japan firms expect conditions to improve over 3 months
* Analyst sees tougher times for service sector
* U.S. recovery seen in Q4 2009, Japan to follow in 2010 (For more stories on the Japanese economy, click)
By Izumi Nakagawa
TOKYO, April 16 (Reuters) - Confidence at Japanese companies is hovering near record low levels but firms expect business conditions to improve in the next three months, a Reuters poll showed -- a sign that Japan's worst recession in decades may be moderating.
Japan's major exporting industries, such as the electronics and auto sectors, have been battered as demand crumbles amid global economic turmoil.
But hefty cutbacks to production have led to progress in reducing inventories, while stimulus packages from governments worldwide are also expected to ease some of the pain.
Current sentiment among big manufacturers improved slightly from a record low hit in March but confidence at large non-manufacturers edged down to be barely above a record low hit in February.
"It suggests the tide is turning for the better for manufacturers who expect demand from abroad, particularly China, to pick up thanks to its stimulus," said Kyohei Morita, chief economist Japan at Barclays Capital.
"Service-sector firms will face a more severe situation, with householders cutting spending due to a worsening in jobs and income conditions as manufacturers continue cutting costs."
The Reuters Tankan survey found manufacturers' sentiment improved 2 points to minus 76 in April, and is seen jumping 24 points to minus 52 by July.
Sentiment among non-manufacturers worsened 1 point to minus 38 but is seen climbing 10 points to minus 28.
U.S., JAPAN RECOVERY
The survey also found Japan is expected to start recovering in the first half of 2010 and that nearly one-third of respondents expect the U.S. economy to start picking up in the final quarter of this year.
But many companies remain wary, saying a recovery in Japan will likely be gradual.
"It's hard to see how things will pan out for the auto industry," one transport machinery company said in the poll.
"Even if inventory adjustments run their course, we'll have to wait longer before we can expect an increase in sales."
Boding ill for an export-reliant economy, data on Thursday showed that China's economy, a key market for Japan, grew at its slowest rate ever in the first quarter.
The data weighed on the stock market, with the Nikkei average trimming gains to be up 0.5 percent.
The Reuters poll, to which 219 firms responded, was conducted from March 26 to April 13 and is designed to be a leading indicator for the Bank of Japan's closely watched tankan corporate survey.
The BOJ's latest quarterly tankan, released on April 1, showed Japanese business confidence crumpled at its fastest pace on record to an all-time low.
It also showed that sentiment will improve somewhat by June, although the jump was not as big as the July forecast in the Reuters Tankan.
Sentiment for manufacturers in the BOJ survey was seen climbing 7 points while non-manufacturers sentiment was only set to rise 1 point.
The Reuters Tankan and BOJ tankan show a correlation of 95 percent for their headline sentiment indexes for manufacturers since the Reuters survey started in 1998.
For a graphic on the Reuters Tankan and BOJ tankan click http://graphics.thomsonreuters.com/apr09/JP_RTKN0409.jpg
RIPPLE EFFECTS
Current sentiment in the electronics and autos sectors stayed at record low levels and other sectors such as steel and retail were also reeling from the ripple effects.
"Things are not looking up because of the slump in major industries including cars and industrial machinery," said a steel company in the survey.
Sentiment in the steel/nonferrous metals sectors stood at minus 100 for the fifth straight month.
Japan's economy shrank in the final quarter of last year at the sharpest rate since the first oil crisis in 1974, and companies are cutting jobs and curbing wages, prompting consumers to tighten their belts.
"Personal consumption is declining as consumers try to guard against a deterioration in living standards," said a retailer in the survey. "They are reluctant to buy things that are not urgently needed."
Economists expect the world's second-biggest economy to keep shrinking in the third quarter for a record six consecutive quarters of decline.
In the Reuters Tankan the percentage of respondents who say conditions are poor is subtracted from those who say they are good. A negative figure means most of those surveyed are pessimistic. (Additional reporting by Mari Terawaki; Writing by Tetsushi Kajimoto; Editing by Edwina Gibbs)