Nikkei up, defensive shares gain as gloom deepens

*Nikkei ends up 2.8 pct, but economy fears weigh *Nikkei up on week despite worst one-day loss since 1987 *Exporters up on weaker yen, defensive shares gain

*Trading houses hit by oil woes (Adds stocks, details) By Elaine Lies

TOKYO, Oct 17 (Reuters) - Japan's Nikkei average gained 2.8 percent on Friday and ended the week up 5 percent a day after its biggest one-day loss since the 1987 crash, with worries about the global economy limiting gains by Canon Inc and other exporters.

Investors turned sharply defensive in the face of growing global economic gloom, with that sentiment and a ratings upgrade propelling telecoms shares such as NTT DoCoMo Inc higher. Pharmaceuticals also gained as a result.

The Nikkei began a tumultuous week by surging 14 percent on Tuesday, its biggest gain ever, after markets were closed for a holiday. But Thursday saw its biggest one-day loss since 1987 as fears grew that bank rescue measures would not stave off a global recession.

The benchmark still finished the week with gains of 5 percent, its first positive week since early September. But it has lost 23 percent this month and 43 percent this year.

"A safety net may have been put in place for the financial system, but the worsening of the global economy has just begun," said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments.

"There's a lot of nervousness about this here in Japan, which is so export-dependent. The biggest worry right now is emerging markets, especially China, which appears to be slowing too."

The benchmark Nikkei .N225 gained 235.37 points to 8,693.82 after earlier rising more than 3 percent, capping a week of roller-coaster trade. On Tuesday it rose more than 1,000 points for the biggest one-day percentage gain in its history, but on Thursday it fell more than 1,000 points.

The broader Topix rose 3.4 percent to 894.29.

Investors were lightening their positions ahead of the weekend, nervous about what New York trade could bring. Caution about the week ahead limited gains, and market players said rises next week were likely to be capped near 8,800.

"Trade next week will remain volatile," said Takahiko Murai, general manager of equities at Nozomi Securities.

"After all, we have no idea what will happen."

HOPING FOR ECONOMIC STEPS

A Reuters poll of 10 market players on Thursday found that most believe the only way to halt the slide in the Nikkei is government spending and new economic policies, preferably as part of a coordinated effort between major economic powers.

Japan's economy is teetering on the brink of recession and a Reuters survey on Thursday showed manufacturers at their gloomiest since six years ago, when the country was in the aftermath of a banking crisis.

The growing gloom sent investors flocking to defensive shares such as communications, drugmakers and power companies.

NTT DoCoMo Inc and other telecoms shares rose after Nikko Citigroup upgraded ratings on the stocks to "Buy" from "Hold", citing their attractiveness as a defensive play amid deteriorating business sentiment. DoCoMo jumped 7.4 percent to 156,500 yen, Nippon Telegraph and Telephone rose 9.8 percent to 425,000 yen, and KDDI Corp gained 7.1 percent to 545,000 yen.

Astellas Pharma rose 9 percent to 3,860 yen, becoming the second-biggest contributor to the Nikkei 225 by volume weight after KDDI.

Fellow drugmakers Eisai Co Ltd rose 4.9 percent to 3,430 yen, while Chugai Pharmaceutical Co Ltd climbed 4.6 percent to 1,301 yen.

The dollar held its own against the yen a day after having its best day against the yen in seven months, fetching around 101.42 yen in afternoon trade . Its gains helped prompt a wave of short-covering that boosted exporters broadly, with Canon rising 5.7 percent to 3,180 yen and Honda Motor Corp gaining 5.2 percent to 2,225 yen. Trading houses, though, suffered because long-term demand for oil is expected to be weak, with U.S. crude up $2.57 in Asia CLc1 a day after falling below $70 a barrel, a 15-month low.

Mitsui & Co lost 3.5 percent to 944 yen and Sojitz was down 1.8 percent at 166 yen. Sumitomo Corp lost 4.9 percent to 713 yen.

Trade fell off, with 2.3 billion shares changing hands on the Tokyo exchange's first section compared with last week's daily average of 2.9 billion.

Advancers outpaced decliners by more than 5 to 1. (Reporting by Elaine Lies; editing by Sophie Hardach)