* Japan PM signals ready to intervene in FX markets again
* Manufacturing, service-sector sentiment seen worsening
* BOJ Tankan recovery may slow, add pressure for BOJ easing
* Ruling party backbenchers urge BOJ to ease more
* Intervention risk seen rising if dlr falls below 85 yen
By Leika Kihara and Izumi Nakagawa
TOKYO, Sept 16 (Reuters) - Japan's prime minister signalled on Thursday that authorities would keep intervening to curb yen strength as sagging manufacturing confidence underscored the threat the currency poses to the fragile economic recovery.
A Reuters monthly poll that tracks the Bank of Japan tankan report showed manufacturing confidence dropped in September from August for the first time in nearly a year as firms struggled with the yen's rise to a 15-year high against the dollar.
Responding to concerns about the yen's rise, authorities intervened in markets on Wednesday for the first time in six years to knock the currency lower.
Bank of Japan money market data showed the yen-selling may have totalled up to 1.86 trillion yen ($21.7 billion), which would be a record for a single day.
Prime Minister Naoto Kan, who fended off a leadership challenge from a ruling party powerbroker this week, pointed on Thursday to more yen selling if needed.
"If rapid fluctuations in the yen harm Japanese firms' appetite for investing at home and push them to shift their factories overseas, that could further worsen job conditions and affect (our efforts) to overcome deflation," Kan said.
"I will take decisive steps if needed from now on as well," he told a business group.
Some currency traders believe the likelihood of another round of intervention would increase if the dollar slipped back below 85 yen. Its now trading at 85.4 yen, having strengthened from around 83 yen before the intervention.
PRESSURE ON BOJ?
Kan, struggling to unify his party and facing a divided parliament, wants to be proactive in tackling the yen after winning the ruling party leadership race on Tuesday.
He is expected to reshuffle his cabinet soon but retain Yoshihiko Noda as finance minister.
"He (Kan) is trying to send a message of his party's solidarity. He is showing the strong intention of Japan to take decisive action through intervention," said Ayako Sera, market strategist at Sumitomo Trust & Banking.
A panel of junior lawmakers in the ruling Democratic Party of Japan (DPJ) urged the Bank of Japan to call an extraordinary meeting to ease policy and so support the government's efforts.
Central bank sources have said the authority has no plan to call an emergency meeting but is ready to act at its next scheduled meeting in early October if the economic recovery remains under threat.
The panel suggested the BOJ increase its buying of Japanese government bonds, although BOJ Governor Masaaki Shirakawa reiterated his opposition to the idea.
"We hardly observe the fact that massive expansions in central bank balance sheets result in an increase in inflation in advanced economies," Shirakawa said in a conference speech.
Shirakawa told a securities dealers' gathering later on Thursday that the BOJ would take timely action as needed and keep providing ample funds to money markets.
In addition, sources familiar with the matter said on Wednesday the BOJ will not drain the money flowing into the economy as a result of the selling, indicating it plans to use the sold yen as a monetary tool to boost liquidity in the economy.
YEN THREAT TO EXPORTS
The intervention pushed the dollar more than 3 percent higher on Wednesday, a big move for a currency.
Japan faced some international criticism for its solo intervention. Since most advanced economies are grappling with slow growth at home, making exports an economic imperative, Japan's move heightened concerns countries would launch a round of competitive devaluations to support their own exports.
U.S. lawmaker Sander Levin, who chairs a congressional committee examining China's currency policy, blamed Beijing for Japan's "deeply disturbing" intervention.
But Kan faces domestic pressure for more action on the yen.
"The dollar has recovered to about 85 yen now after the government and Bank of Japan intervened yesterday, and we want them to continue taking strong action to reverse the yen's strength," Toshiyuki Shiga, chairman of the Japan Automobile Manufacturers Association (JAMA), told a news conference.
"A dollar of 85 or 90 yen is not a level at which job losses can be prevented in Japan," he added.
Japan's economic recovery from the global crisis has faltered with export growth slowing down. Signs the U.S. recovery is also stuttering has added to Tokyo's concerns.
Underlining those concerns, the Reuters Tankan survey, which has a 95 percent correlation with the BOJ's closely watched quarterly tankan business sentiment survey, showed the manufacturers' sentiment index fell 5 points from August to plus 17, down for the first time since October 2009.
Still, the Reuters index has risen during the July-September quarter, suggesting the BOJ data due on out on Sept. 29 will also show a rise. ($1=85.75 Yen) (Additional reporting by Yoko Nishikawa, Kaori Kaneko, Tetsushi Kajimoto and Yoko Kubota; Writing by Tetsushi Kajimoto and Linda Sieg; Editing by Edmund Klamann, Nathan Layne and Neil Fullick)