* Yen's rise to 7-week high weighs on Nikkei on Thursday
* Nikkei falls 3 pct in 2010 after 19 pct gain previous year
* Long-term trend stays strong, Japan shares seen undervalued
By Chikafumi Hodo
TOKYO, Dec 30 (Reuters) - Japan's Nikkei average ended the year on a sour note on Thursday, pressured by profit-taking as the yen advanced to a fresh seven-week high against the dollar.
The benchmark Nikkei booked a 3 percent loss for 2010 as the yen's strength over the course of the year stoked worries about the outlook for Japan's export-led economy. In 2009, the Nikkei had gained 19 percent led by a rally in high-tech exporters.
Still, Japanese shares have rebounded from the year's lows on buying led by foreign investors, with their recovery having gathered momentum since November following monetary easing by the Federal Reserve and the Bank of Japan.
Overseas investors have been major buyers during this recovery on the view that Japanese shares were undervalued compared with those in other developed markets, analysts said.
"Today's move very much symbolises the trend of the year as the fluctuation of the yen basically drove Japanese stocks," said Masaru Hamasaki, a senior strategist at Toyota Asset Management.
On the final trading day of the year on Thursday, the Nikkei lost 1.1 percent or 115.62 points to 10,228.92.
However, the Nikkei gained about 9.2 percent in the last quarter of 2010, after having slumped to the year's intraday low of 8,796.45 on Sept. 1.
The broader Topix slipped 1 percent on Thursday to 898.80.
Although the Nikkei fell 3 percent on the year, when accounting for changes in currency rates it gained 10.7 percent, according to Thomson Reuters data. That is roughly in line with the performance of the Dow Jones industrial average.
"It's fair enough to say that Japanese stocks were mainly hit by the yen's strength and if you leave out the forex factor, the Nikkei actually performed pretty similarly to the Dow," Toyota Asset's Hamasaki said.
Japanese financial markets will be closed from Friday for the year-end break and reopen next Tuesday.
LONG-TERM TREND STAYS STRONG
The long-term outlook stayed bullish, however, as investors remain eager to buy Japanese stocks which they see as undervalued compared with those in other major markets.
"The long-term bullish trend in Japanese stocks is still in place, but we have to remember that this scenario is only alive as long as the yen won't rise too rapidly," said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments.
The dollar was down 0.2 percent at 81.50 yen in late Asian trade. It fell as low as a fresh seven-week low of 81.28 yen earlier.
"The recent advance of the yen has been a bit unexpected and clearly having a negative psychological impact on share prices," said Takashi Ohba, a senior strategist at Okasan Securities.
Daily volume picked up from the previous day, with 1.47 billion shares changing hands on the Tokyo Stock Exchange's first section, from 1.31 billion shares on Wednesday. It was below last week's daily average turnover of 1.63 billion shares.
Shares of exporters fell, reflecting the stronger yen. Sony Corp dropped 1 percent to 2,927 yen and Panasonic also lost 1 percent, to 1,153 yen.
Mizuho Financial Group dropped 2.6 percent to 153 yen after Japan's second-largest bank said it would buy preferred shares in consumer credit firm Orient Corp from Morgan Stanley and Kohlberg Kravis Roberts for 30 billion yen ($368 million).
Orient rose 9.2 percent to 95 yen.
Hitachi rose 1.9 percent to 433 yen following a series of reports about the country's biggest electronics conglomerate.
Mitsubishi Heavy Industries Ltd and Hitachi will jointly bid for a 350 billion yen ($4.3 billion) rail project in Bangkok, pushing the two Japanese conglomerates closer to merging their overseas rail businesses, the Yomiuri newspaper reported on Thursday.
Mitsubishi Heavy fell 1.3 percent to 305 yen.
On Wednesday, the Sankei newspaper reported the company is likely to clinch a contract for a UK rail network project as early as the start of next year.
Agility Trains, a consortium consisting of Hitachi and British infrastructure project manager John Laing, have been the preferred bidders on the contract. (Reporting by Chikafumi Hodo; Editing by Chris Gallagher)