(Updates to midmorning)

TOKYO, Dec 18 (Reuters) - The Nikkei average rose 0.7 percent on Thursday, as bank shares sustained gains after a rate cut by the U.S. Federal Reserve, though Honda Motor (7267.T: Quote, Profile, Research) slashing its profit forecasts in its third warning this year.

Panasonic Corp (6752.T: Quote, Profile, Research) rose after Goldman Sachs (GS.N: Quote, Profile, Research) agreed to the electronics giant's offer to buy its stake in Sanyo Electric Co Ltd (6764.T: Quote, Profile, Research) although Sanyo shares fell as the bid was only slighter sweeter than one rejected Goldman earlier this month. [ID:nT242792]

A bold rate cut to as low as zero by the U.S. central bank has ratcheted up the pressure on a reluctant Bank of Japan to follow suit this week, with economists saying to hold back would rock Japanese markets and worsen the crisis. [ID:nT222002]

The BOJ starts its two-day policy meeting later in the day.

"Hopes for the recovery of the economy in the long-term are helping buoy the market as we seem to be getting into the phase of zero interest rates globally," said Yoshinori Nagano, a chief strategist at Daiwa Asset Management.

The benchmark Nikkei .N225 added 60.03 points to 8,672.55, after opening down 0.6 percent.

The broader Topix .TOPX gained 0.4 percent to 841.67.

The dollar was little changed at 87.30 yen JPY=, but stayed in sight of 87.13 yen hit on Wednesday, the lowest since mid-1995, weighing on some exporters.