(Rewrites throughout)

By Junko Fujita

TOKYO, July 2 (Reuters) - Japanese government bonds tumbled

on Thursday on renewed fiscal concerns, while AI-related

heavyweights dragged down the Nikkei share average after an

overnight tech selloff on Wall Street.

The yen rose sharply against the dollar, with traders alert

to the prospect of intervention to prop up the stubbornly weak

currency.

The 10-year government bond yield rose 7

basis points to 2.77%, the highest since mid-May, after a weak

debt auction highlighted concerns about heavier government

spending.

Japanese bond markets have been under pressure since the

government outlined large spending plans in its latest policy

blueprint this week and called on the Bank of Japan to align

monetary policy with growth efforts.

"There has been a shock wave from the blueprint in the

market," said Katsutoshi Inadome, a senior strategist at

Sumitomo Mitsui Trust Asset ​Management.

Inadome said the removal of wording on fiscal consolidation

had revived concerns about borrowing.

Japan said combined public and private investment would

exceed 370 trillion yen ($2.28 trillion) through fiscal 2040 as

it works with the private sector to support strategic

industries.

Investors worry that could mean more borrowing, while the

Bank of Japan may be slow to raise rates as inflation pressure

builds.

The benchmark Nikkei 225 slid 2.5% to 68,733.15,

while the broader Topix ended 0.09% higher, helped by

buying in cheaper shares after recent declines.

Chip-related Advantest ( ADTTF ) and Tokyo Electron ( TOELF )

fell 9.95% and 7.44%, respectively. Memory chip maker Kioxia ( KXHCF )

dropped 13.47%.

"The market is going through a natural correction, where

investors sold technology stocks to lock in profits and bought

cheap stocks," said Kouji Toda, a senior fund manager at Resona

Asset Management.

The Nikkei soared 37% last quarter, marking its sharpest

advance in data going back to 1965.

Of the more than 1,500 stocks trading on the Tokyo Stock

Exchange's prime market, 77% rose, 20% fell and 1% traded flat.

The yen traded near a 40-year low before jumping

suddenly late in the session.

(Reporting by Junko Fujita and Rocky Swift in Tokyo; Editing by

Subhranshu Sahu)