* Utility stocks lead losses on stress test concern
* But benchmark may continue to rally this month-analysts
* Support seen at 10,000
By Antoni Slodkowski and Ayai Tomisawa
TOKYO, July 7 (Reuters) - Tokyo stocks looked set to snap a seven-day winning streak as utilities tumbled after the government proposed stress tests on nuclear reactors, sparking fears their restarts may be delayed, but the 10,000 line on the Nikkei index held, boosting hopes for further gains.
The Nikkei fell prey to some profit-taking after becoming oversold with its Relative Strength Index hovering near 70, and after piercing above the upper Bollinger Band -- another short term overheating indicator -- as it pushed through chart resistance the previous day on buying by model funds.
Basket orders from domestic pension funds and Asian investors, on Thursday adding up to 24 billion yen, supported the view held by many analysts that the Nikkei may keep rising heading into April-June earnings season as Japanese companies recover faster than expected from the March 11 earthquake.
"Except for Tokyo Electric, utilities have attractive valuations, so investors have kept them in their portfolios on hopes that their reactors will eventually operate normally," said Naoki Fujiwara, a fund manager at Shinkin Asset Management.
"But now there is much uncertainty over operations delays and investors are unloading them."
All regional utilities tumbled between 5 and 8 percent as local authorities stepped back from granting approval to a nuclear reactor restart, saying government policy remains unclear.
The approvals were seen as necessary to restart the reactors after they were shut for routine maintenance and the step back delivers a further blow to efforts to ease tight power supplies this summer and means that utilities fossil fuel costs will likely climb.
By midafternoon the Nikkei had shed 0.1 percent to 10,071.47, while the broader Topix index fell 0.2 percent to 871.51.
The gas and utilities sector has shed some 40 percent since the quake as power companies were aggressively offloaded on fears about changes to Japan's nuclear and energy policy that would threaten their regional monopolies and as they are set to be required to help Tokyo Electric compensate victims of the ongoing nuclear crisis.
Kyushu Electric , which owns the Genkai reactor that had been expected to get the green light for a restart soon, tumbled 7.1 percent to 1,357 yen.
Kansai Electric Power , the biggest loser on the Nikkei, dropped 8 percent to 1,459 yen after Nomura Securities cut its rating to "neutral" from "buy" and slashed its target price to 1,650 yen from 1,900 yen, saying the tests will likely delay the restart of its reactors.
"If its reactor restart plan is delayed for a long time, the company may need to hike electricity fees by 20-30 percent to cover the cost of alternative fuels," said Nomura analyst Shigeki Matsumoto. "But such a big rise may not be agreed to by the government."
STILL ATTRACTIVE
Analysts said Tokyo shares still look attractive as those listed on the Topix are trading just above their book value, while those on Wall Street's benchmark S&P 500 are at about 2.2 times book value, according to ThomsonReuters Starmine.
"Rallies are likely on hopes that Japanese companies will report better-than-expected April-June earnings later this month," said Hiroichi Nishi, general manager at SMBC Nikko Securities.
"Japanese stocks with cheap valuations and growth prospects will likely attract more investors."
Battery maker GS Yuasa gained 2.2 percent to 554 yen after Mitsubishi Motors Corp launched two new versions of the i-MiEV electric car on Wednesday and said that it would continue using batteries made by its joint venture with Mitsubishi Corp and GS Yuasa for the i-MiEV's "G" grade.
Mitsubishi Motors was up 3 percent at 104 yen while Mitsubishi Corp gained 1.2 percent to 2,097 yen.
Shares in some regional banks, such as Chiba Bank and Bank of Yokohama dropped after Goldman Sachs downgraded them to 'neutral' from 'buy'. (Additional reporting by Antoni Slodkowski; Editing by Joseph Radford)