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* Financial shares underpin market, led by CBA
* Investors cautious ahead of Fed meeting this week (Adds details, comments)
SYDNEY, June 17 (Reuters) - Australian shares reversed early losses to finish 0.7 percent higher on Monday after a rebound in Japanese stocks buoyed market sentiment and bolstered financials like Commonwealth Bank of Australia.
Top lender Commonwealth Bank of Australia rallied 2 percent, Australia and New Zealand Banking Group jumped 2.3 percent and National Australia Bank climbed 1.8 percent.
"The burst higher in Japanese equities turned around investor sentiment," said Tim Waterer, a senior trader at CMC Markets.
"Banks were back in favour as part of a yield play," he said. Australia's top four banks currently have dividend yields of between 5 percent and 6 percent.
The S&P/ASX 200 index finished 34.1 points higher at 4,825.9. The benchmark rose 2.1 percent on Friday, its biggest one-day gain in 18 months.
Japan's Nikkei share average climbed 2.7 percent.
Still, investors remained cautious as they awaited a two-day Federal Reserve meeting later this week for clues as to whether the U.S. central bank will start to scale back its stimulus programme. On Monday, 586.8 million shares changed hands on the Australian bourse in a relatively quiet session, down from 678 million shares on Friday.
"If the Fed decides to tighten (monetary policy) prematurely, the U.S. economy could step into recession, in which case that would drag the rest of the world down, China and Australia included," said Damien Boey, equity strategist at Credit Suisse.
"So people are looking to the Fed for guidance but the risk is they'll tighten too early."
Defensives also underpinned the market. Consumer retail staples Woolworths Ltd added 0.9 percent and Wesfarmer Ltd rose 0.8 percent. Insurance provider QBE Insurance Ltd jumped 2.1 percent.
But miners BHP Billiton Ltd and Rio Tinto Ltd slipped 0.3 percent and 0.6 percent, respectively, after Shanghai steel rebar futures slipped to a nine-month low on Friday. Although the futures index recovered more than 2 percent to hit a near three-week high on Monday, Chinese demand remains in check due to slower economic growth and overcapacity.
Elsewhere, Iron Road Ltd dived 51.7 percent to A$0.195 after issuing new shares at a heavily discounted offer price of A$0.18 per share to raise $50.7 million in cash.
Tandou Ltd soared 6.3 percent after revising its full year earnings forecast to between $8.7-$9.5 million.
Data#3 Ltd dropped 8.3 percent after the IT company said it expects to report a net profit after tax (NPAT) for the 2013 financial year in the range of $11 million to $12.5 million.
New Zealand's benchmark NZX 50 index added 0.6 percent or 26.7 points to finish the session at 4,447.6. (Reporting by Thuy Ong; Editing by Chris Gallagher)