Tokyo  - Tokyo stocks rebounded Tuesday from a 26-year low as the yen fell against the dollar and euro, investors hunted for bargains and the government instituted new restrictions on short selling.

The benchmark Nikkei 225 Stock Average soared 459.02 points, or 6.41 per cent, to close at 7,621.92, nearly erasing all of its 486.18-point loss from Monday.

The broader Topix index of all first-section issues also was up 37.57 points, or 5.03 per cent, at 784.03.

The gains ended a four-day losing streak, which wiped out nearly a quarter of the Nikkei's value.

The day began on a sour note, as the Nikkei briefly dropped below 7,000, but investors returned to the market to buy up stocks trading at historic lows.

Confidence was also boosted by a ban imposed by the government on naked short-selling as it sought to stabilize Asia's largest bourse after similar crackdowns in the United States, Australia and some European markets.

Short-selling involves borrowing shares in the hope of buying them back later at a cheaper price to make a profit. With naked short-selling, traders sell stocks before even borrowing them. They do not deliver them to the buyers right away and instead wait until the price drops to purchase the shares and then hand them over to the buyers.

Naked short-selling raises fears that markets would be flooded with sell orders that would drive down prices.

The short-selling ban was to be imposed November 4, but the government brought it forward after the Nikkei's plunge Monday to help calm the domestic market, Finance Minister Shoichi Nakagawa said.

The Nikkei has fallen 50 per cent this year and is set for its worst-ever annual performance.

Nakagawa had also expressed concern about the rising yen, which hit a 13-year high against the dollar Monday. But on Tuesday, it saw sharp falls.

On currency markets at midday (0300 GMT), the dollar traded at 93.25-30 yen, up from Monday's 5 pm quote of 92.95-98 yen.

The euro traded at 1.2405-10 dollars, down from Monday's 5 pm quote of 1.2441-43 dollars, and at 115.68-78 yen, up from 115.65-69 yen.

Because of the strength of the yen, major Japanese firms in Japan's export-oriented economy, such as Sony Corp, were expected this week to reduce their corporate earnings projections for the year. A stronger yen reduces their overseas revenues. dpa ln ls