Japan's Nikkei bounces 1.9 pct, Cyprus still an issue

* Cyprus parliament to vote on bailout on Tuesday

* Kirin advances 2.4 pct on buyback plan

TOKYO, March 19 (Reuters) - Japan's Nikkei average rebounded 1.9 percent on Tuesday, regaining some but not all ground lost after a proposal to tax Cyprus savers to help fund the island's bailout raised concerns about the stability of Europe's banking sector. The Nikkei gained 227.13 points to 12,447.76 after sliding 2.7 percent in the previous session, its biggest one-day drop in 10 months. A senior trader at a foreign bank in Tokyo said financial markets were likely to experience higher volatility as investors tried to assess how serious the Cyprus deal would have on the euro zone's banking system. "We were one of the biggest markets to open post-Cyprus situation. People took the opportunity to sell the most liquid market first," the trader said. "There was a bit of knee-jerk reaction ... We are bouncing this morning. It is not a surprise." Ahead of a parliamentary vote in Cyprus that will either secure the island's financial rescue or threaten default, euro zone ministers have urged Cyprus to let smaller savers escape a levy on bank deposits. Still, many in the markets are concerned that it will set a precedent that could lead to other bailout countries imposing something similar to depositors. "My sense is that domestic investors are probably small sellers today in this bounce," said the trader at the foreign bank. "I don't think they really sold much yesterday. We also have a lot of programme flow today, which means sort of portfolio rebalancing flows." Overnight losses in European markets and Wall Street were not as severe as in Tokyo on Monday, helping ease investors' concerns. Europe's FTSEurofirst 300 slipped 0.3 percent and U.S. S&P 500 eased 0.6 percent. Toyota Motor Corp, Sony Corp, Mazda Motor Corp and Sumitomo Mitsui Financial Group were up between 1.8 and 4.4 percent. Sony was the most traded on the main board by turnover, while Toyota was the fourth-most traded. Investors are also focused on the U.S. Federal Reserve two-day policy-setting meeting starting later in the day and the change of leadership at the Bank of Japan this week. The benchmark Nikkei has rallied nearly 44 percent since mid-November after Prime Minister Shinzo Abe embarked on aggressive fiscal expansionary and monetary easing policies to revive the ailing economy.

STILL UPBEAT Goldman Sachs remained upbeat on Japanese equities, lifting its 12-month Topix target to 1,250 from 1,100. "Without a doubt, going "long Japanese equities" has become one of the most popular trades among global investors in 2013. This is not to say, however, that every long-only foreign investor is neutral or overweight Japan," Goldman Sachs said in a note. "We estimate that if the underweight gap of 2.8 percentage points of EAFE-benchmark mutual funds were to close, this could imply roughly $42 billion of potential foreign inflows from this investor segment." Foreign investors bought 1.12 trillion yen ($11.7 billion) worth of Japanese shares in the week through March 9, their largest net buying since the Ministry of Finance began collecting the data in 2005. They bought a total of 5.36 trillion yen in the past 17 weeks, versus 5.80 trillion in their 19 straight weeks of net buying when reformer Junichiro Koizumi was the prime minister. The broader Topix index advanced 1.6 percent to 1,044.66 on Monday morning. Other notable gainers included Kirin Holdings Co Ltd , up 2.4 percent after it the brewer said it would spend up to 50 billion yen to buy back as much as 5.2 percent of its shares outstanding to lift shareholders' returns. In the current environment of low interest rates, Bank of America Merrill Lynch highlighted a list of Japanese stocks that it said offer sustainable yields for investors. Those stocks included brewer Asahi Group Holdings, retailer Seven & I Holdings, trading company Itochu Corp, lender Mitsubishi UFJ Financial Group, Nippon Building Fund Inc and optical maker Hoya Corp .