* Nikkei volatility index falls but market careful
* U.S. political woes keep investors cautious - analyst
TOKYO, Aug 31 (Reuters) - Japan's Nikkei share average rose to two-week highs on Thursday morning after the dollar rose against the yen helped by bright U.S. economic data, lifting cyclical stocks such as automakers and financial companies.
The Nikkei gained 0.7 percent to 19,642.76 by the midday break after reaching as high as 19,661.39, the loftiest level since August 17.
Japanese exporters benefited from a weaker yen, as the dollar gained on strong U.S. gross domestic product data and U.S. private-sector employers that bolstered expectations for a solid U.S. jobs report later this week.
Subaru Corp rose 1.3 percent, Honda Motor Co gained 1.0 percent, Hitachi Ltd soared 1.5 percent and Keyence Corp surged as much as 1.7 percent to a record high of 58,340 yen.
Investors, however, remain nervous about the prospect of a U.S. government shutdown, and a potential debt default if lawmakers don't raise the nation's debt ceiling by the end of September.
"The market is still careful about taking large positions with ongoing U.S. political woes, which could pressure the dollar to the yen again," Hiroyuki Nakai, chief strategist at Tokai Tokyo Research Center said. "We don't know how much fall the Nikkei will see then."
Some of the alarm raised by regional tensions following North Korea's latest missile test also moderated.
"Extreme fears about North Korea have receded and the volatility index which rose early this week is falling now so the mood has recovered," Nakai said.
The Nikkei Volatility Index, which fell 1.0 percent to 14.64 on Thursday, spiked to a one-week high of 16.32 on Tuesday on geopolitical fears after North Korea fired a ballistic missile over Hokkaido island into the sea.
Banking stocks gained, with Mitsubishi UFJ Financial Group rising 1.9 percent and Sumitomo Mitsui Financial Group up 1.7 percent.
Meanwhile, Fujifilm Holdings rose as much as 4 percent after it said on Wednesday it would buy back up to 16 million of its shares, representing 3.7 percent of total outstanding, for up to 50 billion yen.
The broader Topix gained 0.6 percent to 1,616.78. (Editing by Simon Cameron-Moore)