TOKYO, Feb 18 (Reuters) - Japan's Nikkei share average

rose on Tuesday, as investors cherry-picked banks on interest

rate-hike bets and defence stocks after their European peers

closed higher overnight.

The Nikkei had climbed 0.3% to 39,296.11 by the

midday break, while the broader Topix was up 0.2% at

2,772.78.

U.S. markets were closed on Monday for a holiday and the yen

traded mostly unchanged on Tuesday, leaving Japanese stocks to

trade in recent ranges as share- and sector-specific drivers

drew the biggest moves.

Mitsubishi Heavy Industries ( MHVYF ) and other

defence-related shares rallied, after their European peers

gained on Monday as investors priced in the likelihood of

increased military spending in the region.

Mitsubishi Heavy Industries ( MHVYF ) rose 2.8%, Kawasaki Heavy

Industries ( KWHIF ) climbed 3.4% and IHI Corp ( IHICF ) jumped

4.6%.

Rate-sensitive banks made modest gains again after data

showed on Monday the economy expanded more than expected in the

fourth quarter, supporting the Bank of Japan's (BOJ) plans to

continue hiking rates.

Market attention will be on remarks by BOJ board member

Hajime Takata on Wednesday, followed by the CPI report on

Friday.

If the inflation report produces a strong number, that may

lead to bets that the BOJ will hike again sooner than currently

expected, strengthening the yen, said Masahiro Ichikawa, chief

market strategist at Sumitomo Mitsui DS Asset Management.

"If the yen appreciates significantly, that could put

pressure on Japanese stocks and potentially trigger selling," he

said.

Mizuho Financial Group ( MFG ) gained 0.8%, Sumitomo Mitsui

Financial Group ( SMFG ) was up 0.4%, and Mitsubishi UFJ

Financial Group ( MUFG ) rose 0.9%.

Nissan Motor ( NSANF ) surged 5.4% after the Financial Times

reported rival Honda Motor ( HMC ) is ready to revive merger

talks if Nissan ( NSANF ) CEO Makoto Uchida steps down. Honda ( HMC ) ticked up

0.3%.

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

added 2.5% and 1.8%, respectively, to give the Nikkei

the biggest lift.