* Earnings expectations lift Nikkei
* Nikkei may see more gains if dollar rises vs yen -fund manager
* Canon, Kao bought after robust earning reports
* U.S. debt impasse may slow market's steady gains -analysts
* Utilities lower on report of rising fuel costs
By Ayai Tomisawa
TOKYO, July 26 (Reuters) - The Nikkei stock average rose on Tuesday, helped by companies such as Canon and Kao Corp that reported robust quarterly earnings and gave strong profit forecasts, offsetting the dampening impact of the strengthening yen.
Market players said sporadic buying by Asian investors was detected on Tuesday but concerns about a deadlock in U.S. talks to raise the debt ceiling left investors wary, although most expect lawmakers to clinch a deal before the Aug. 2 deadline.
U.S. debt worries are also driving the Japanese yen towards a record high against the dollar, denting optimism that Japanese manufacturers, whose exports are undermined by a strong Japanese currency, will continue to recover steadily from the damage caused by the March 11 earthquake.
In the morning, the dollar hit a four-month low of 77.883 yen on trading platform EBS, edging closer to a record low of 76.25 yen hit in March.
Despite such ominous external factors, however, strong earnings from the Japanese corporate sector are lifting investor sentiment.
"Investors are confident that Japanese companies can generate profits even with current foreign exchange rates," said a portfolio manager at a U.S. asset management firm, who declined to be quoted by name.
"If the dollar stays near 80 yen, there probably won't be a big sell-off, and if it rises towards 82 yen, the Nikkei may head towards 10,500."
Camera and office equipment maker Canon rose 3.0 percent to 3,900 yen and was the second most actively traded stock by turnover, after it posted better-than-expected quarterly profits and raised its annual forecast following a rapid recovery from supply chain woes triggered by the March 11 earthquake.
The world's biggest camera maker set assumed rates of 80 yen to the dollar and 115 yen to the euro for July-December, compared with current rates around 78 yen per dollar and 112.98 yen per euro.
EARNINGS EXPECTATIONS
The benchmark Nikkei was up 0.7 percent at 10,124.79 in early afternoon trade. The broader Topix index gained 0.8 percent to 869.01.
But market participants said that, while further gains could be expected depending on corporate earnings results, the uptrend may not be a smooth one.
"It's difficult to bid stocks up further from here unless we see a conclusion on the U.S. debt ceiling," said Yutaka Miura, senior technical analyst at Mizuho Securities.
Some market players who had sold Nikkei futures on Monday on worries about the U.S. debt ceiling deadlock were covering their short positions after Wall Street shares posted smaller losses than they had expected, Miura said.
Traders said the Nikkei was likely to be supported above its 200-day moving average, now around 9,915, as Japan's earnings season kicks into high gear next week, with expectations high for results to show more evidence of a recovery from the quake.
The Nikkei is still not far from a four-month intraday high of 10,207.91 hit this month, a break of which could open the way for a return to pre-quake levels a bit above 10,250.
But some analysts said further improvements in earnings outlooks were necessary for the Nikkei to recover to pre-quake levels.
"The Nikkei's P/E is already above 15, so for the Nikkei to rise further, we'll need to see more upward revisions in annual earnings outlooks," said Mizuho Securities' Miura.
Kao Corp surged 4.7 percent to 2,262 yen after the household goods maker raised its full-year outlook and posted a 12 percent rise in April-June operating profit on brisk sales of its chemical products overseas and an earlier-than-expected recovery in domestic sales after the quake.
Utilities underperformed the market, with Chubu Electric dropping 0.4 percent to 1,429 yen and Tokyo Electric Power shedding 2.8 percent to 520 yen, after the Nikkei business newspaper reported that fuel costs at Japan's five largest electric power companies are expected to surge a combined 2 trillion yen ($25.5 billion) this fiscal year as they rely on fossil fuel-fired plants to make up for capacity lost from offline nuclear reactors.
Tohoku Electric Power dropped 0.7 percent to 1,076 yen and Kyushu Electric Power was down 0.4 percent at 1,323 yen. (Additional reporting by Hideyuki Sano; Editing by Edmund Klamann)