* Nikkei gains 1.3 percent
* Blue-chip exporters chased by bargain hunters
* Nikkei up 3.6 pct in December, still down 1.9 pct in 2010
* Volume low as foreigners absent
By Antoni Slodkowski and Ayai Tomisawa
TOKYO, Dec 21 (Reuters) - Japan's Nikkei average rose 1.3 percent on Tuesday, clawing back towards a seven-month high hit last week as investors rushed to buy on dips after the previous day's losses that followed a fall in Shanghai equities.
Bargain hunters disregarded a slightly stronger yen against the dollar and aggressively added blue-chip exporters, encouraged by rebound in Chinese markets that lost the day before amid expectations that access to funds may become harder as banks curb lending towards the year-end.
Adding to positive sentiment was a calming of the situation on the Korean peninsula, where the North Korea stepped back from confrontation over military drills by the South on Monday and reportedly made a new offer on nuclear inspections.
"Investors are buying on dips, pushing the Nikkei higher after yesterday's losses," said Takashi Ohba, a senior strategist at Okasan Securities.
Major electronics maker Sony Corp gained 2.6 percent, construction machinery maker Komatsu Ltd climbed 1.6 percent and Mitsubishi Motors Corp added 2.2 percent.
"The Nikkei was flat last week and traders waited for any positive factors to trade on -- they got a good opportunity today so the market is posting solid gains," said Ohba.
He said traders' next target looms at around 10,420.74, where futures and options contracts expiring in December settled earlier in December.
"If that resistance is pierced, even on low volume, the Nikkei will be on track to end the year above 10,500," he said.
By mid-afternoon the benchmark Nikkei gained 1.3 percent or 131.28 points to 10,348.05, while the broader Topix rose 0.9 percent to 906.47.
VOLUME SAGS AHEAD OF CHRISTMAS
Lower volume added to market volatility as foreign investors, who have been net buyers of Japanese equities for the last six weeks to help the Nikkei rally some 13 percent since the beginning of November, were less active due to Christmas holidays.
By the midday break only 656 million shares had changed hands on the Tokyo Stock Exchange's first section, putting it on course to end the session well below last week's daily average of around 2.1 billion shares.
But analysts said the Nikkei may be re-energised next week when foreign investors return from holiday.
"We may see some window-dressing buying at the end of the month, which is something of a trend every year," said Fujio Ando, senior managing director at Chibagin Asset Management.
"They may buy large cyclical stocks at the year-end and the Nikkei may rise further," Ando said.
Sentiment was further boosted after the Bank of Japan kept monetary policy on hold and said it will steadily purchase various assets and provide longer-term funds through its 35 trillion yen ($418 billion) asset buying and market operation fund, to ensure that the effects of its monetary easing steps spread across the economy.
Shares of Shinsei Bank surged 7.8 percent in heavy trade after the bank said on Monday it had reorganised its consumer finance division to strengthen its retail banking operations. ($1=83.77 Yen) (Editing by Michael Watson)