* Nikkei edges up after previous day's drop
* Stocks supported as yen stabilises near 2-mth low vs dollar
* Some talk of buying by overseas funds
By Antoni Slodkowski
TOKYO, Nov 25 (Reuters) - Japan's Nikkei average rose 0.4 percent on Thursday and edged back toward a five-month high hit earlier this week, supported by demand from overseas investors and the yen's recent dip against the dollar.
Tokyo shares regained some of the ground lost the previous day, when worries over tensions on the Korean peninsula prompted investors to book profits from a recent rally.
The Nikkei edged higher in moderate trade ahead of a U.S. holiday, helped by gains in blue-chip exporters such as Honda Motor Co, Toyota Motor Co and Sony Corp.
"Foreign hedge funds and European pension funds are spurring the demand today, but turnover will be low in the afternoon ahead of Thanksgiving," said Hiroaki Kuramochi, chief equity marketing officer at Tokai Tokyo Securities.
"The Nikkei is also up because many foreign market players still see Japanese stocks as cheap," Kuramochi said, adding that a fall in the euro and worries over Ireland's debt could limit the Nikkei's short-term gains.
The Nikkei rose 0.4 percent to 10,066.04, after previous day's 0.8 percent fall, edging back towards a five-month intraday high of 10,157.97 hit on Monday.
The broader Topix index climbed 0.4 percent to 870.31.
The benchmark Nikkei average has rallied about 9 percent this month, helped by short-covering and year-end portfolio tweaking by overseas investors.
Thursday's trading volume was moderate, with some 0.96 billion shares exchanging hands on the Tokyo exchange's first section, suggesting that volume would come in near last week's daily average of roughly 1.9 billion shares.
SENTIMENT SOLID
The dollar dipped 0.1 percent against the yen to 83.47 yen, but was holding near a seven-week high of 83.85 yen hit earlier this week on trading platform EBS.
The dollar was supported after U.S. data the previous day showed a fall in new claims for jobless benefits to two-year lows and another rise in consumer spending, suggesting the U.S. economy is nearing a self-sustaining recovery.
Ireland unveiled an ambitious austerity plan to tackle its debt crisis and secure an international bailout on Wednesday, which some analysts said was a step in the right direction.
But already the plan's credibility has come under fire for sticking to economic growth assumptions, unveiled earlier this month, seen as too optimistic.
Market players said a further fall in the euro could hurt shares of Japanese exporters that have exposure to European markets.
Some market players also worry that the Nikkei's recent rally looks overstretched.
"The Nikkei is still very solid and its sentiment remains bullish, but Japanese shares could soon enter a phase of correction as I think the pitch of the rise has been a bit too rapid," said Masaru Hamasaki, a senior strategist at Toyota Asset Management.
"From here, we want to look at the U.S. market. The market wants to see whether U.S. consumption would pick up during the year-end holiday season," Hamasaki said.
Trading house Sojitz Corp rose 0.6 percent to 169 yen in heavy trade, adding to a 9.1 percent jump the previous day after the firm said it had formed a tie-up with Australian mining company Lynas Corp on the supply of rare earth metals.
Trading volume in Sojitz was nearly twice the five-day average.
Major electric wire and cable manufacturer SWCC Showa Holdings jumped 16.4 percent to 85 yen and Sumitomo Electric Industries Ltd, a major producer of electric wires and cables, climbed 4.2 percent to 1,125 yen after the Nikkei business daily said the companies would start mass production of superconducting wire next year for use in smart power grids and car motors. (Additional reporting by Chikafumi Hodo and Masayuki Kitano; Editing by Edmund Klamann)