(Refiles to add dropped words "the month" to paragraph 9)
* Nikkei ends flat after hitting six-month high at one point
* But sentiment strong amid signs of recovery in US economy
* Technical indicators show signs of overheating
* Trade thin as investors await U.S. payroll data
By Antoni Slodkowski
TOKYO, Dec 3 (Reuters) - Japan's Nikkei share average held onto recent gains on Friday as U.S. retail and housing data raised hopes for a swifter recovery in the world's biggest economy while concerns about Europe's debt crisis eased.
Stronger-than-expected November same-store sales from U.S. retailers, a sharp jump in pending home sales, and a better labour market became the latest signs that the U.S. economic recovery is on track and a double-dip recession less likely.
Traders also said the European Central Bank was buying Portuguese and Irish debt on Thursday, calming investor panic over euro zone debt for now and offsetting initial disappointment after ECB President Jean-Claude Trichet did not explicitly commit the bank to ramping up bond buying.
The Nikkei climbed 1.4 percent on the week and at one stage on Friday hit a six-month intraday high before succumbing to profit-taking after its divergence above its 25-day moving average -- a gauge used widely among Japanese traders -- climbed into overbought territory.
"Investors' expectations that the U.S. economy will pick up steam are rising and that's why the market tested the six-month high today," said Kazuhiro Takahashi, general manager at Daiwa Capital Markets
The Nikkei ended flat holding on to its Thursday's gains of almost 2 percent, adding 0.1 percent or 9.8 points to 10,178.32 in light trade. At one stage it rose as high as 10,254.00.
The broader Topix index was 0.2 percent higher at 879.22.
Market players said caution set in ahead of U.S. nonfarm payroll data later in the day and next week's special quotation.
The closely watched settlement price, known in Japan as the special quotation or "SQ", is calculated from the opening prices of the 225 shares on the Nikkei average on the second Friday of the month.
But popular stock Fast Retailing lost around 3 percent after domestic sales at its Uniqlo casual-clothing chain tumbled 14.5 percent year-on-year in November. It was one of the most actively traded stocks by turnover and the worst performing Nikkei component in percentage terms.
FOREIGN FUNDS
Market players said foreign funds, the driving force behind the Nikkei's 8 percent rally in November, are continuing to purchase Japanese equities.
"Momentum players are increasing their holdings in Japanese stocks, especially global cyclical shares like major exporters thanks to the weaker yen," said Mitsushige Akino, general manager at Ichiyoshi Investment Management.
"Buying in November was mostly due to short-covering, but new buying is being seen this month," said Akino adding that funds may look beyond exporters and may start aggressively adding financial stocks if the Nikkei rises to near 11,000.
The U.S. government's monthly employment report on Friday is forecast to show another month of job gains in both the private and public sectors. In a Reuters poll, nonfarm payrolls are seen up 140,000 in November, while private payrolls are seen up 153,000..
The precision machinery sector, which includes many euro-sensitive stocks outperformed other sectors, with camera and endoscope maker Olympus Corp rising 1.4 percent and camera and printer maker Canon Inc up 1.5 percent.
Trade was thinner with less than 1.6 billion shares changing hands on the Tokyo exchange's first section, the lowest this week and well below its last week's closing average of 1.9 billion.
Advancing stocks outnumbered declining ones by almost 2 to 1. (Additional reporting by Aiko Hayashi and Ayai Tomisawa; Editing by Edwina Gibbs)