Japan's Nikkei jumps 6.4 pct after hitting 26-yr low

* Nikkei reverses course, ends up 6.4 percent

* Exporters such as Honda rebound, soft yen helps

* Nikkei earlier fell below 7,000 for first time since 1982

* Banks slide on dilution fears from capital raising

By Aiko Hayashi

TOKYO, Oct 28 (Reuters) - The Nikkei average climbed 6.4 percent on Tuesday, as exporters such as Honda Motor jumped on a softer yen, but trade was volatile with the benchmark briefly breaking below 7,000 for the first time in 26 years.

Seven & I Holdings Co jumped more than 14 percent after Credit Suisse lifted its rating on Japan's largest retailer to "outperform" from "neutral," citing a stable outlook for its earnings and the defensive nature of its stock.

Shares of major banks dropped on dilution concerns after Japan's top lender Mitsubishi UFJ Financial Group said it would raise up to $10.6 billion to replenish a capital base depleted by a plunging stock market and its investment in Morgan Stanley

"We can't tell at what point the market will stop its slide as sellers expect their clients could close their accounts and they are also just fearful," said Yoshinori Nagano, chief strategist at Daiwa Asset Management.

"But an increasing number of investors have started seeing Japanese stocks as quite cheap and trade volume is picking up accordingly, even if it's only little by little."

Traders also said public pension funds seem to have contributed to gains in the market.

The Nikkei .N225 gained 459.02 points to 7,621.92. It earlier fell as much as 2.3 percent to 6,994.90, its lowest since 1982.

It is down 32 percent so far this month and has lost half its value since the start of this year.

The broader Topix .TOPX rose 5 percent to 784.03 after falling 3 percent at one stage.

Trade was active on the Tokyo exchange's first section, with 3.2 billion shares changing hands, compared with last week's daily average of 2.4 billion.

Reflecting growing concern over recent market volatility, Finance Minister Shoichi Nakagawa said the government would ban from Tuesday naked short-selling, in which traders effectively sell stocks without first borrowing them to sell.

But market players said the government action had little impact.

"It's better than nothing, but they are temporary measures and lack vision on where the government wants to take the Japanese economy in the mid to long term," said Takahiko Murai, general manager of equities at Nozomi Securities.

EXPORTERS JUMP

Shares of Honda jumped 14 percent to 2,065 yen, while Toyota Motor Corp shot up 7.8 percent to 3,170 yen.

After the close, Honda, Japan's second-biggest automaker, lowered its annual profit forecasts as a deepening financial crisis hammers global car demand and sends the yen soaring against major currencies.

High-tech exporters also gained after the dollar climbed 1.1 percent to 93.78 , moving away from from a 13-year trough of 90.87 yen struck on Friday.

Sony Corp surged 9.6 percent to 1,996 yen and Canon Inc advanced 7.6 percent to 2,555 yen.

Seven & I Holdings jumped 14.1 percent to 2,750 yen.

Shares of other so-called defensive stocks also helped buoy the market. Kao Corp , Japan's biggest household products maker, gained 8.3 percent to 2,940 yen.

Japan's top three banks slid. Media reports have said Mizuho Financial Group and No.3 Sumitomo Mitsui Financial Group also plan to beef up their capital bases.

"Bank shares are being hit by the news about boosting capital. More than anything, that would damage the demand-supply balance," said Murai at Nozomi Securities.

"It also indicates that the financial state of banks has really deteriorated."

Mitsubishi UFJ fell 5.5 percent to 551 yen and Mizuho lost 6.6 percent to 214,900 yen, although they recovered from double-digit percentage falls in the morning. Sumitomo Mitsui tumbled 13 percent to 335,000 yen. (Reporting by Aiko Hayashi; Editing by Edwina Gibbs)