By Shinichi Saoshiro

TOKYO (Reuters) - Japanese government bonds fell on Monday, the first trading day of 2010, dented by a rise in the Nikkei stock average and the yen's drop to a four-month low against the dollar.

JGBs were also hurt after U.S. Treasuries retreated on Thursday after lower-than-expected weekly U.S. jobless claims bolstered expectations of an economic recovery.

March 10-year JGB futures fell 0.26 point to 139.44 by the midday break.

The benchmark 10-year yield rose 2.5 basis points to 1.310 percent, having climbed 9 basis points over the course of two weeks.

Market players expect the 10-year yield to stay under upward pressure, due in part to selling from dealers making room on their books ahead of Wednesday's JGB sale.

"It is difficult to see the 10-years bouncing back until this week's auction is over. The stock market is the other main focus for JGBs this week," said Takafumi Yamawaki, a senior rates strategist at BNP Paribas Securities.

The Ministry of Finance will sell 2.2 trillion yen ($24 billion) of 10-year JGBs on Wednesday, the first test of supply for the market in 2010.

Supply concerns, which helped the 10-year yield rise to a five-month high of 1.485 percent in November, have partially ebbed for the time being after the MOF announced debt issuance plans for the fiscal year beginning April 2010 that were in line with market expectations.

Japan will still issue 144.3 trillion yen of JGBs to the market in fiscal 2010/11, up 4.9 percent from this fiscal year and a record high.

Analysts said supply and demand will remain one of the key market themes of 2010 as bond investors grapple with ever increasing debt issuance.

A more immediate focus for JGBs was the recent fall in Treasuries and how the U.S. bond market reacts to the closely watched U.S. employment data due on Friday in light of growing signs of an economic recovery.

Tokyo's Nikkei climbed 1.2 percent <.N225> on a weaker yen and after U.S. jobless claims data strengthened hopes for a steady economic recovery.

The dollar traded around 92.95 yen after breaking above 93 yen last week for the first time since September.

A weak dollar, which hit a 14-year low below 85 yen in November, was a factor that recently fanned prospects of deflation in Japan as it reduces the cost of imports, which in turn can push down consumer prices.

The Bank of Japan has implemented a very easy monetary policy, which took two-year JGB yields to four-year lows in December, to combat deflation and help the economy.

The two-year yield rose 1.5 basis points to 0.155 percent, after brushing a four-year low of 0.140 percent last week.