* Nikkei poised for third straight negative week
* Charts show Nikkei oversold, global economy worry weighs
* Nikkei target at 8,697, a 61.8 pct retracement
By Elaine Lies
TOKYO, Aug 27 (Reuters) - Japan's Nikkei average slipped back towards a 16-month low on Friday in thin and nervous trade, with investors fearing more falls could lie ahead depending on U.S. economic data due out later in the day.
Market players said that whether the market closed above 8,800 was likely to be one key to future moves, with few technical support points below that level.
But market direction was hard to predict ahead of a speech by Federal Reserve Chairman Ben Bernanke at the annual Federal Reserve conference in Jackson Hole, Wyoming.
"It had appeared that risk avoidance might be starting to abate slightly, but with poor figures expected for the U.S. GDP data later today there's a lot of wariness in the market," said Nagayuki Yamagishi, a strategist for Mitsubishi UFJ Morgan Stanley Securities.
"In addition, U.S. indicators recently haven't been very good, especially housing-related ones, so there'll be a lot of market attention on what Bernanke says for hints as to what sort of policy steps the Fed might take, and that could affect the dollar/yen rate."
The dollar eased slightly against the yen, edging down to 84.38 yen, not far from a 15-year low hit earlier this week.
The benchmark Nikkei shed 0.9 percent or 77.38 points to 8,829.10 by midday, not far from a 16-month low of 8,807.41 hit on Wednesday, and appeared poised for its third straight negative week, its worst such run since April.
The broader Topix lost 0.7 percent to 806.45
One target for the Nikkei stands at 8,697, a 61.8 percent retracement of the rally between its March 2009 low and April 2010 high.
Charts showed the Nikkei remains oversold, although it edged slightly above its lower Bollinger Band after falling through it on Wednesday. But its relative strength index (RSI) stood at 33, with 30 and under seen as oversold, with its slow stochastic -- a measure of how oversold the market may be -- still deep in oversold territory.
Market players have said that the longer the Nikkei stays below 9,000, which has been a key support level several times in the past year, the greater the chance that strong resistance will develop at that point.
POLICY VACUUM?
Over the medium term, markets are nervous about a potential policy vacuum in Japan after ruling party powerbroker Ichiro Ozawa said on Thursday he would challenge Prime Minister Naoto Kan for the leadership next month.
"It's really unfortunate that there has to be so much uncertainty at a time of a strengthening yen and when the government wants to draw up an economic stimulus plan," said Noritsugu Hirakawa, a strategist at Okasan Securities.
"This is a bad time to have a political vacuum."
U.S. stocks initially rose on data showing first-time claims for jobless benefits fell more than expected last week, but the number was still too high to signal a shift in the weak labour market and the four-week average of such claims rose to a 9-month high. All three Wall Street indexes ended down.
Tech shares slipped after their U.S. peers fell, with the Philadelphia Semiconductor Index losing 2 percent. Tech shares are often seen as a proxy for U.S. growth.
Kyocera Corp lost 2.5 percent to 7,060 yen and TDK Corp shed 0.9 percent to 4,255 yen.
Brewer Kirin Holdings fell 2.7 percent to 1,156 yen after saying it would acquire the shares it did not already own in wine maker Mercian Corp via a stock swap. Mercian shares surged 7.4 percent to 159 yen. (Editing by Michael Watson)