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Nikkei up in volatile trade as bargain hunters target battered stocks

* Nikkei outperforms Topix, gains led by futures

* ETF trade becomes active - traders

* Goldman's strategist's bullish stance on Japan buoys sentiment - traders

* Nikkei's volatility index hit above 40

By Ayai Tomisawa

TOKYO, Sept 2 (Reuters) - Japanese stocks rose in volatile trade on Wednesday morning as investors picked up bargains, although sentiment remained fragile as lingering concerns about China's economy dented global equities.

Gains were led by futures buying, which lifted index-heavy stocks such as Fast Retailing Co and Fanuc Corp , up 2.7 percent and 2.9 percent, respectively. The stocks together contributed a hefty 82 positive points to the Nikkei.

Trader said the market was also supported by an overnight interview with Peter Oppenheimer, the chief global equities strategist at Goldman Sachs, who told CNBC that investors should use the latest bout of market turmoil to accumulate Japanese stocks.

"Valuations are not that extreme there (in Japan), so I think you've got the combination of a tailwind from policy and from the currency - but actually some real fundamental improvements from corporate profitability," Oppenheimer told CNBC.

The Nikkei rose 0.6 percent to 18,275.60 in midmorning trade after falling to a low of 17,857.30 soon after the market opened. The benchmark index tumbled 3.8 percent on Tuesday after surveys showed China's factory sector shrank for the sixth straight month in August.

Along with other global markets, Japanese stocks have been hit by worries of a China-led slowdown in the global economy. Still, the Nikkei is up about 5 percent this year, while the S&P 500 index has dropped 7 percent and the FTSEurofirst 300 index of top European shares is only up 1.8 percent.

Traders said that when the Nikkei falls below 18,000-levels, its price-earnings-ratio drops to around 14, which makes the stocks attractive for pension funds and retail investors.

"Investors are buying back as the market fell too sharply yesterday," said Masashi Oda, senior investment officer at equity investment department at Sumitomo Mitsui Trust Bank.

He said that given the volatility, investors are actively trading the NF Nikkei 225 Leveraged Index ETF, which rose 1.5 percent and was the most traded stock by turnover.

Traders said that volatility may persist in the market for a while, with the Nikkei volatility index rising above 40 percent again earlier Wednesday.

The short-selling ratio on Tuesday hit a fresh record high of 41.0 percent, according to data provided by the Tokyo Stock Exchange.

Defensive shares outperformed, with Kyowa Hakko Kirin jumping 4.4 percent and Eisai Co soaring 3.0 percent.

The broader Topix was flat at 1,478.05 and the JPX-Nikkei Index 400 was also flat at 13,272.11.

(Editing by Shri Navaratnam)