(Updates with details and closing values)

By Satoshi Sugiyama

TOKYO, July 1 (Reuters) - Japan's Nikkei share average

closed higher for a third consecutive session on Wednesday,

supported by AI-related shares, though fresh hurdles in

U.S.-Iran peace negotiations and investor caution in a volatile

market limited gains.

The benchmark Nikkei 225 advanced 0.59% to close at

70,474.96, paring an earlier surge of as much as 2.7%. The

broader Topix ended 0.42% higher at 4,011.50.

"Domestically, buying is likely to lead in chip-related

stocks, suggesting the market will open higher," analysts at

Tokai Tokyo Intelligence Laboratory said in a note.

"That said, the Nikkei average rose sharply at the open the

previous day before quickly losing momentum, so investors should

remain wary of short-term overheating and profit-taking."

Tehran said on Tuesday it would not meet with top U.S.

envoys who had flown to the region, with the two sides still far

apart on a framework that would fully open the Strait of Hormuz.

Market breadth was mixed, with 96 advancers in the Nikkei

225 against 127 decliners, while two were unchanged.

Chip-related shares led gains in the benchmark, with Sumco ( SUMCF )

surging 17.37% to its highest close since October 2007,

while Taiyo Yuden ( TYOYF ) jumped 12.43% to an all-time high.

Screen Holdings ( DINRF ) rose 9.46%, also reaching a record

high.

Shares of Kawasaki Heavy Industries ( KWHIF ) swung sharply,

briefly rising more than 5% before closing 7.66% lower on the

day. Reuters reported the company was finalising plans to raise

about 200 billion yen ($1.23 billion) through new shares and

convertible bonds to fund capital expenditure.

Among decliners, department store operator J. Front

Retailing 3086.T was one of the Nikkei's worst performers,

dropping 7.6% after disappointing March-May earnings.

Sentiment among large Japanese manufacturers improved in the

three-month period ended June to its highest levels since 2018,

the Bank of Japan's Tankan survey showed on Wednesday.

Companies, however, expect business conditions to worsen

over the next three months as they brace for rising costs and

potential supply constraints stemming from the Middle East

conflict.

($1 = 162.6600 yen)