Expectations that Washington will be able to resolve the 'fiscal cliff' -- a combination of spending cuts and tax increases taking effect in the new year -- also added to the positive mood in the market.

The Nikkei rose 1.1 percent to 9,937.44 by the midday break, taking the index deeper into "overbought" territory, with its 14-day relative strength index at 81, well above 70 which is deemed overbought and often indicates a possible near-term correction.

The benchmark Nikkei also broke above the upper band of the Bollinger Bands, a short-term momentum indicator, also signalling a possible pull back in the short-term.

 "At this stage, we've seen some profit-taking in utilities after a huge move they made yesterday. The yen-sensitive, LDP-trade is still in full effect, with volume remaining very good considering the quiet period of the year," a senior dealer at a foreign brokerage said.

"We wouldn't be surprised to see profit-taking a little bit more than we are currently seeing."

The benchmark Nikkei has risen 14.7 percent over the past five weeks, driven by yen weakness after Shinzo Abe, who was elected as the new prime minister on Sunday, called for the central bank to embark on "unlimited easing" and set an inflation target of 2 percent. The index is up 17.5 percent this year.

Exporters and real estate firms, which benefit from a weaker yen and Abe's call for reflationary policy, extended gains on Tuesday.

Among the exporters, Toyota Motor Corp, Honda Motor Co, Canon Inc and Hitachi Ltd were up between 1.9 and 2.2 percent, while the real estate sector added 1.3 percent.

BNP Paribas said it expected the Nikkei to reach 11,000 in the first half of next year, 10.7 percent above where it ended Tuesday's morning session.

Its top picks under a weak yen scenario included Toyota, construction machinery maker Komatsu Ltd, steelmaker JFE Holdings, Canon, lender Sumitomo Mitsui Financial Group and game company Nintendo Co Ltd.

Center>Copyright Reuters, 2012