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Japan business mood steady at high levels as economy recovers -Reuters Tankan

* Manufacturers' sentiment index +26 in July, flat from June

* July service-sector index +33, unchanged from prior month

* Manufacturers' mood seen up ahead, service sector down

* Reuters Tankan closely correlates with BOJ tankan

TOKYO, July 19 (Reuters) - Japanese manufacturers' and service providers' business confidence held steady at high levels in July, a Reuters poll found on Wednesday, underlining the central bank's upbeat view on the economy.

Manufacturers' sentiment stood at a decade-high peak and service-sector mood maintained its two-year high, offering further evidence of broadening confidence.

Sentiment was likely to hold largely steady over the next three months.

The readings in the Reuters' monthly poll - which tracks the Bank of Japan's closely watched quarterly tankan - should be encouraging to the central bank, which is set to offer a more upbeat view of the economy this week than it did in June.

At a two-day rate review that ends Thursday, the BOJ is seen likely to keep monetary policy steady even as it cuts its inflation forecast, people familiar with the matter say, underscoring the challenge it faces in using monetary stimulus to lift prices.

The sentiment index for manufacturers stood at 26 in the poll of 549 large- and mid-sized firms, conducted between June 30 and July 13, in which 266 companies responded. The index matched the readings recorded in April and June, which were the highest since August 2007, just before the global financial crisis. It was seen improving to 28 in October.

"Japan's economy as a whole is on the upswing, and the local economy is not bad. In addition, we have built overseas bases in Southeast Asia over the last 15 years. Japanese-owned businesses in our overseas markets are increasingly calling out to us now," a manager of an electrical machinery maker wrote in the survey.

A textile maker wrote: "Sales in our businesses are solid as currencies, raw materials and fuel prices are moving as expected, and as the global economy centring on the United States and China remains in an expansionary trend."

The Reuters Tankan service-sector index hovered at 33, unchanged from June's reading, which was the highest level since mid-2015. It was seen slipping to 31 in October.

The Reuters Tankan indexes are calculated by subtracting the percentage of pessimistic respondents from optimistic ones. A negative figure means pessimists outnumber optimists.

The BOJ's last tankan out July 3 showed big manufacturers' business confidence hit its highest level in more than three years in the June quarter, providing further evidence that the recovery in the world's third largest economy is gaining momentum.

(Reporting by Tetsushi Kajimoto; Editing by Eric Meijer)