* Next target for Nikkei 8,697, 61.8 pct retracement
* Investors eye U.S. data, worry about more dlr selling
By Elaine Lies
TOKYO, Sept 1 (Reuters) - Japan's Nikkei average edged up 0.4 percent on Wednesday as technology shares and exporters gained in reaction to a sharp fall the day before, reversing an early drop that took the benchmark briefly to a 16-month low.
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.
Though the Nikkei quickly pared losses to edge back above 8,800, market players said 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, and this may well be factored in, but the market is nervous that the figures might possibly 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.
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.
The benchmark Nikkei rose 39.35 points to 8,863.41 after earlier falling as low as 8,796.45. The broader Topix was flat at 804.67.
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.
"With the yen remaining as strong as it is we're unlikely to see much of a rise today as there's simply no reason to buy for now," said Yutaka Miura, a senior technical analyst at Mizuho Securities.
"But the fact that overseas shares didn't fall that much means that Tokyo is unlikely to do much more than move sideways."
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.
Exporters and tech shares that were sold sharply on Tuesday crawled higher.
Kyocera Corp rose 1.4 percent to 7,230 yen, Tokyo Electron gained 0.6 percent to 3,965 yen and Canon Inc edged up 0.2 percent to 3,430 yen.
Hitachi rose 1.2 percent to 344 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 Michael Watson)