TOKYO, Jan 7 (Reuters) - Japan's Nikkei share average

rebounded more than 2% on Tuesday, as chip-related shares

tracked their U.S. peers higher.

The Nikkei had risen 2.44% to 40,264.5 by the midday

break, after a 1.47% drop in the previous session.

"It looks like the market is betting on potential for large

stocks, which are preferred by foreign investors," said Kentaro

Hayashi, a senior strategist at Daiwa Securities.

Overnight, the S&P 500 and the Nasdaq Composite rose to more

than one-week highs, boosted by a rally in semiconductor stocks

and a report that suggested the incoming Trump administration

could adopt a less aggressive tariff stance than expected.

The broader Topix rose 1.31% to 2,792.49. The Topix

Core 30, made up of top 30 firms, climbed 1.96%, while

the Topix Small, which consists of stocks excluding the

top 500, edged up 0.23%.

Among individual stocks, chip-making equipment maker Tokyo

Electron ( TOELF ) surged 10.35% to provide the biggest boost to

the Nikkei. Chip-testing equipment maker Advantest ( ADTTF )

jumped 7.05%.

Chip-maker Renesas Electronics ( RNECF ) rose 7.62% and

chip-making device supplier Disco climbed 7.99%.

Banks gained as Japanese government bond yields rose, with

Mitsubishi UFJ Financial Group ( MUFG ) and Sumitomo Mitsui

Financial Group ( SMFG ) up 3.47% and 2.75%, respectively.

Cosmetics maker Kao fell 1.46% to weigh on the

Nikkei the most.

Nippon Steel ( NISTF ) slipped 1.46%. The steel maker's chief

executive said on Tuesday that the firm would never give up on

expanding in the United States.

U.S. President Joe Biden unlawfully blocked Nippon Steel's ( NISTF )

$14.9 billion bid for U.S. Steel through a sham national

security review, the companies alleged in a lawsuit filed on

Monday.

Of more than 1,600 shares traded on the Tokyo Stock

Exchange's prime market, 53% rose and 42% fell, with 3% trading

flat.