Nikkei up 1.7 pct, biggest gain in two weeks

*Nikkei sees first rise in 5 days, biggest pct gain in 2 weeks

*Exporters boosted by sharp oil fall, softer yen

*Volume at year's low as investors stay on sidelines (Adds stocks, details)

By Elaine Lies

TOKYO, Aug 25 (Reuters) - Japan's Nikkei average climbed 1.7 percent on Monday, its biggest one-day percentage gain in two weeks, with Honda Motor Co leading the market after a sharp fall in oil prices eased economic worries.

Banks also forged higher, with Mitsubishi UFJ Financial Group and other megabanks all gaining more than 4 percent, after U.S. financial stocks rose on hopes that struggling investment bank Lehman Brothers may attract a major investor.

But the drop in oil prices, which steadied above $114 per barrel after falling 5.4 percent in the previous session, hit resource-linked shares and trading houses, with gas and oil field developer Inpex Holdings Inc sliding 4.5 percent to 1.14 million yen.

Volume fell to its lowest this year, with 1.3 billion shares changing hands on the Tokyo Exchange's first section, even lower than the level marked on Jan. 4, a half-day of trade. Last week's daily average was 1.59 billion.

"Oil is a support, as is the weaker yen, but the market isn't as strong as you might expect from these two things and doesn't seem to have the strength to rise more," said Tomomi Yamashita, a fund manager at Shinkin Asset Management.

"There's no incentives to buy right now, no sense that the market's going to rise from here on in."

Others were wary about Friday's rebound on Wall Street that boosted Tokyo shares in tandem, noting that too many uncertainties still remain about financial shares in particular and the U.S. economy in general.

"If Tokyo was really responding to this, there should have been a much bigger rise, but investors remain wary with so few of the large U.S. problems really resolved," said Fujio Ando, a senior managing director at Chibagin Asset Management.

Investors were also nervous ahead of a slew of key Japanese economic data due out on Friday, including retail sales and industrial output figures for July, as well as consumer prices data.

The benchmark Nikkei gained 212.62 points to 12,878.66, its first positive close in five trading days and its biggest one-day percentage gain since Aug. 11.

The broader Topix rose 1.9 percent to 1,239.25. Both earlier rose more than 2 percent.

OIL, YEN

U.S. light crude for October delivery CLc1 was at $114.94 by 0607 GMT. On Friday the contract fell $6.59, or 5.4 percent, for its greatest one-day percentage loss since Dec. 27, 2004.

This, plus a generally strong dollar, helped boost the Nikkei broadly, giving exporters a particular boost.

Honda led the Nikkei higher with gains of 4.4 percent to 3,590 yen, becoming the top contributor by volume weight. Toyota Motor Co also gained, climbing 2.9 percent to 4,910 yen. Sony Corp rose 4.4 percent to 4,300 yen and Canon Inc climbed 2.8 percent to 5,110 yen. Banks in Tokyo forged higher in tandem with their U.S. peers, which rose after the Korea Development Bank [KDB.UL] said Lehman Brothers -- battered by losses sparked by the U.S. housing slump -- was a possible acquisition target . Brokerages also rose after the Nikkei business daily reported on Saturday that Japan's financial regulator planned to recommend a tax exemption for older people on up to 5 million yen ($45,410) in capital gains from stock investments and 1 million yen in dividends , though some market players were sceptical about how much the move might really help.

Mitsubishi UFJ Financial Group rose 4.8 percent to 831 yen and Mizuho Financial Group , Japan's No. 2 bank, gained 4.8 percent to 462,000 yen. Sumitomo Mitsui Financial Group climbed 4.2 percent to 664,000 yen.

Nomura Holdings Inc , Japan's largest brokerage, gained 3 percent to 1,450 yen and Daiwa Securities Group Inc rose 2.3 percent to 847 yen. Okasan Holdings Inc rose 3.8 percent to 520 yen.

Advancing shares outnumbered declining shares by more than 6 to 1. (Reporting by Elaine Lies; Editing by Michael Watson)