POLL-Japan funds increase euro bond weightings to 10-mnth high

* Funds increase allocations of North American bonds

* Stock allocations edge higher amid improving risk appetite

* See table for survey breakdown

TOKYO, Oct 31 (Reuters) - Japanese fund managers pushed their allocation for euro zone bonds to the highest level in 10 months as yields stabilised, but cut their overall exposure to bonds from last month's record high as risk appetite revived, a Reuters poll found.

A survey of 10 Japan-based fund managers, polled between Oct. 17 and 24, showed allocations for euro zone bonds against those from other regions up at 22.2 percent, the highest rate since December 2011.

``We believe the ECB's commitment to purchase Southern European government bonds regardless of their rating strongly underscores the downside of the asset class,'' said Yoshino Akio, chief economist at Amundi Japan.

Bond yields in highly indebted Spain have come down since hitting euro-era highs in late July, but remain rewarding enough to entice yield-hungry Japanese investors, who reduced their holdings of domestic debt to a 10-month low of 38.2 percent.

In another sign of improved risk appetite, bond allocations versus other asset classes dropped to 52.2 percent from a record high of 53.3 percent in September, while equity allocations inched up to 41.2 percent from 39.2 percent last month.

``There's still little space to be optimistic about the global economy, but there are signs that the problems are bottoming out,'' said Kenichi Kubo, senior fund manager at Tokio Marine Asset Management.

However, equity allocations remain below last year's average of 44.4 percent and 45.7 percent in 2010, while bond allocations are still at their second-highest level since the survey began in 1995.

``The flight to quality is still continuing, and it is hard to see when that situation will reverse,'' said one fund manager who declined to be identified.

``However, interest rates are beginning to go up...I also expect the yen to ease slightly, although it will take some time before it makes a move like back in February,'' he continued, referring to the currency weakening to 84.17 yen to the dollar on March 15 from 76 yen on Feb. 1.

The yen softened to a four-month low of 80.36 against the dollar on Oct. 26 due to improved risk appetite on strong U.S. data, signs that the pace of China's slowdown is dropping, and expectations of further easing from the Bank of Japan.

Helped by the more attractive exchange rate, which increases exporters' overseas revenues once repatriated, as well as investors paring back their pessimistic expectations of a poor earnings season, the Nikkei gained 6.9 percent between Oct. 12 and 26.

EQUITIES EXPOSURE UP

Despite that, fund managers cut their exposure to Japanese equities to a five-month low, while bumping up their holdings of shares from the rest of Asia to 11.5 percent, the highest level since April and well above 2011's average of 8.4 percent.

The Japanese benchmark is just 4.6 percent up on the year, trailing gains in U.S. and European markets, with the S&P 500 up 12.3 percent on the year and the Euro STOXX 600 gaining 10.8 percent.

``Reflecting the sour diplomatic relations with China, Japanese stocks are not doing so well. It seems likely they will hit a 2 to 3-year low in November,'' said Yoshino of Amundi Japan.

A territorial spat with China over disputed islands led to riots in China in September, forcing Japanese firms to temporarily close their factories and stores there, further threatening revenues already hit by slowing demand in Japan's biggest export market.

Although the full fallout from the incident is yet to be reflected on company's balance sheets, concern about the impact of a global slowdown meant the quarterly earnings season began in late October on expectations of a slew of forecast cuts.

Sixty-three percent of the 27 Nikkei companies that had reported as of Monday undershot market expectations, according to Thomson Reuters StarMine. That compared with 54 percent in the previous quarter.

However, there was a slight change in sentiment from September's consensus that the U.S. Federal Reserve's launch of its third round of bond buying could counter a global slowdown.

``Continued easing from the U.S. Federal Reserve is offsetting downward forecast revisions, and data from China has taken a turn for the better,'' said a fund manager who wished to remain anonymous.

Fund managers increased the weighting of U.S. and Canadian bonds in their debt portfolios to 25.3 percent in October from 24.1 percent the previous month.

(Editing by Eric Meijer)