* Hedge funds short-covering helps Nikkei bounce back
* Large-lot buying by foreigners boosts confidence
* Key Nikkei support at 9,317 holds
* Toshiba up on small LCD panel business merger news with Sony
* Tepco, other utilities higher on short-covering
By Antoni Slodkowski
TOKYO, June 7 (Reuters) - Tokyo shares on Tuesday snapped a three-day losing streak in which the market slid 3 percent, as hedge funds covered short positions and as foreigners bought back on cheap valuations, a factor that, some say, may support the market in coming weeks.
Hedge funds such as commodities trading advisors were detected piling back into the market after offloading substantial ammounts of shares on Monday, a move triggered by a tumble in shares of troubled Tokyo Electric Corporation , traders said.
Long-term foreign investors placed large-lot orders for a combined 10 billion yen for 20-25 blue-chip companies and 4 billion yen in mid- and small-caps, two market sources said, boosting overall confidence in the market and further bolstering its afternoon rebound.
Toshiba Corp climbed after industry sources told Reuters that it and Sony Corp are in talks to combine their small and mid-size liquid-crystal display (LCD) panel units into a new entity to boost their competitiveness.[ID:nT9E7GR050]
"The market lost 340 yen in three days and hedge funds are now covering their short positions," said Takashi Ohba, a senior strategist at Okasan Securities.
"Both foreigners placing large-lot orders and margin traders scooping up small-caps are attracted by cheap valuations, and buying by those players may give some support to the Nikkei in the next few weeks," he said.
Market participants said shares look attractive with about 65 percent of stocks listed on the Tokyo exchange's main board trading at or below book value. By contrast stocks in the benchmark S&P 500 are at about 2.1 times book value, according to ThomsonReuters Starmine.
This makes Tokyo equities the second cheapest market in the G20, with Italy being the only cheaper market, ThomsonReuters Starmine showed.
"When the Nikkei trades below 9,400 institutional investors buy global cyclical shares as a long-term investment and retail investors tend to buy defensive shares with high dividend yields, such as drugmakers," said Fujio Ando, a senior managing director at Chibagin Asset Management.
The Nikkei reversed most of its Monday's losses, gaining 0.4 percent to 9,419.74 by midafternoon, while the broader Topix was up 0.5 percent at 812.98.
Short-covering in utilities and buying on dips of defensive shares helped the market stay above a key support of 9,317 -- a March 29 intraday low -- although fears of a slowdown in the U.S. economy sparked by a string of weak data are likely to prevent immediate big gains.
The next solid resistance looms around 9,573.26, at the bottom of the Ichimoku cloud on the Nikkei's daily chart.
Utilities rose after underperforming on Monday on speculation that Tokyo Electric Power Co could enter court-led restructuring.
Chief Cabinet Secretary Yukio Edano said on Monday that a court-led restructuring of Tokyo Electric, the operator of the crisis-hit Fukushima Daiichi nuclear plant, must be avoided. [ID:nT9E7GG020]
Tokyo Electric, known as Tepco, gained 2.98 percent to 213 yen, while Kansai Electric Power added 2.2 percent to 1,228 yen.
The pharmaceutical sector outperformed, with Astellas Pharma adding 2.1 percent to 3,125 yen and Eisai rising 0.8 percent to 3,050 yen.
Shares of Sony fell 1.7 percent to 2,028 yen after hackers calling themselves Lulz Security said they had broken into its computer systems again and posted the results on the Internet. [ID:nN06152902]
Toshiba gained 2.8 percent to 408 yen on the news about the LCD partnership with Sony.
"This should be a good move for both companies as while they need to invest in their core businesses (such as NAND and nuclear businesses for Toshiba and new product development for Sony), they are expected to enjoy synergy through the merger of their small LCD panel operations," said Nobuo Kurahashi, an analyst at Mizuho Investors Securities.
Shares of Canon Inc fell 3.4 percent at 3,715 yen after the office equipment and camera maker announced on Monday that it had completed its planned buyback of 50 billion yen worth of its own shares between May 26 and June 3.
The stock, poised for its largest daily percentage fall since mid-March, had risen nearly 6 percent since its announcement of the buyback programme on May 25 through Monday's close. (Additional reporting by Ayai Tomisawa; Editing by Edwina Gibbs)