* China PMI data gives Nikkei a lift
* Next target for Nikkei 8,697, 61.8 pct retracement
* But investors eye U.S. data, worry about more dlr selling
By Elaine Lies
TOKYO, Sept 1 (Reuters) - Japan's Nikkei average edged up 0.5 percent on Wednesday, getting a bit of a boost from a rise in China's purchasing managers index, while technology shares crawled higher in reaction to a sharp fall the day before.
Hitachi Ltd rose after sources familiar with the matter said the company is planning an initial public offering of its hard-drive unit in the United States, possibly by the year-end.
But shortly after the opening the benchmark fell below 8,800 for the first time in 16 months, with market players saying sentiment remained fragile with investors worried about possible negative surprises from a slew of U.S. indicators due out this week, including jobs data.
ADP private employers data is due out later on Wednesday, with non-farm payrolls on Friday.
"A decline from the previous month is forecast for the ADP data, although they are still likely to be positive, and this may well be factored in, but the market is nervous that the figures could perhaps even turn negative," said Hideyuki Ishiguro, a strategist at Okasan Securities.
"This sort of negative surprise could lead to more dollar selling, and this has investors worried."
Growing worries on Tuesday that U.S. indicators due out later this week could prompt dollar selling and lead to a further strengthening of the yen prompted investors to cut losses, sending the benchmark Nikkei down 3.6 percent for its worst one-day performance in three months.
It lost 7.5 percent for the month of August, its worst monthly performance since May.
The dollar had edged up against the yen to 84.34 yen in early trade, but shares got more of a boost from China's official purchasing managers' index, which rose to 51.7 in August from 51.2 in July -- the 18th straight month that the official PMI has stood above the threshold of 50 that demarcates expansion from contraction.
The benchmark Nikkei rose 45.68 points to 8,869.74 by the lunch break, after earlier falling as low as 8,796.45. The broader Topix shed 0.1 percent to 803.69.
"Unless we start seeing some really strong signs from the United States that consumer spending is picking up, the Nikkei will find it tough to recover," said Masayoshi Okamoto, head of dealing at Jujiya Securities.
But with the Nikkei also veering close to oversold according to some charts -- its relative strength index (RSI) was at 38, with anything from 30 and under oversold -- slides were likely to be limited, with some light buying from pension funds possible.
The next target for the Nikkei is 8,697, a 61.8 percent retracement of the Nikkei's rally from its March 2009 low to its April 2010 high.
Market players said some investors were also likely to stay sidelined with a battle between Prime Minister Naoto Kan and powerbroker Ichiro Ozawa for leadership of the ruling party, and hence the premiership, set to open later on Wednesday.
The party will hold its leadership vote on Sept. 14.
POLITICAL VACUUM
"The big issue is that during this period there risks being a political vacuum that could hamper policy-making, possibly encouraging speculators to sell the Nikkei since the chance of this being countered would be lower," said Okasan's Ishiguro.
Tech shares that were sold sharply on Tuesday crawled higher, but exporters erased early gains to head lower, with some blue-chip shares hitting multimonth lows.
Toyota Motor Corp was down 1.5 percent at 2,817 yen, after falling as low as 2,806 yen, its lowest in about 17 months.
Toshiba Corp was down 2.5 percent at 385 yen after hitting its lowest in 13 months and Sharp Corp was down 0.8 percent at 798 yen after touching its lowest in 17 months.
Shares of companies with strong business in China gained, with Hitachi Construction up 1.7 percent to 1,697 yen and Komatsu rising 0.9 percent to 1,720 yen.
Hitachi rose 2.1 percent to 347 yen after sources said bankers are in discussion with the Japanese company about an IPO and underwriters could be named in early September.
The hard-drive unit, Hitachi Global Storage Technologies (HGST), is the world's No.3 hard drive maker and analysts said it could be valued at about $3 billion. (Editing by Chris Gallagher)