* Momentum from EU decision continues to buoy stocks * Cyclical shares such as shippers in favour * Analysts expected bigger gains By Sophie Knight TOKYO, July 2 (Reuters) - Japan's Nikkei share average went into the midday break slightly higher on Monday after an early rally spurred by an agreement to stabilize euro zone banks sputtered out as investors waited for more details. Despite slim gains, risk sentiment was up, with trading companies, steel and shipmakers in favour, while defensive shares such as pharmaceuticals were given the cold shoulder. The Nikkei rose 0.2 percent to 9,020.93, but disappointed some who had hoped for larger gains in response to a surprise decision by euro zone leaders to allow banks to be recapitalized without adding to a country's government debt. "All these things happened on the last day of a quarter and it remains to be seen if the euphoric reaction to the outcome of the summit can actually be sustained until details of agreement are put under closer scrutiny," said Stefan Worrall, director of equity cash sales at Credit Suisse Securities. The Nikkei advanced 1.5 percent on Friday to above 9,000 for the first time in 7 weeks, but closed off the second quarter with a loss of 10.7 percent, its worst quarterly performance since last year's July-September period. Japanese manufacturers' business mood improved in the April-June quarter for the first time in three quarters, as reconstruction in the area worst affected by last year's tsunami makes progress, the central bank's tankan survey showed. That lifted steelmakers and other construction-related companies, with Kobe Steel Ltd climbing 1.1 percent and Tokyo Steel Manufacturing Co Ltd rising 2.4 percent. Cyclical stocks outperformed, with trading companies Marubeni Corp, Itochu Corp and Mitsui Co Ltd rising between 1.4 and 2.1 percent. The shipping sector boasted a 2.6 gain, the largest of any sector, after underperforming the market last week with a loss of 1 percent. Nippon Yusen KK rose 3.4 percent. "I expected bigger gains considering the positive surprise of the EU decision -- the Nikkei has the momentum to at least recover half of its slide from its March high to its June low," said Masayuki Otani, chief market analyst at Securities Japan. A 50 percent retracement of the Nikkei's fall from March 27 to June 4 would take it to 9,243. The broader Topix was up 0.1 percent at 770.71 by the midday break, with volume at 41.5 percent of its full day 90-day average. Now that European leaders have signaled a concrete policy shift to tackle the euro zone debt crisis, investors are expecting the European Central Bank to cut its refinancing rate by 25 basis points at its meeting on Thursday. There are also expectations that the Bank of Japan will expand its easing programme at a policy meeting that concludes on July 12. "The consumption tax legislation appears a green light for the BOJ to ease without fearing that they are monetizing an unsustainable debt burden," wrote Naomi Fink, Japan equity strategist at Jefferies, in a note. A bill to double Japan's consumption tax over three years was passed by the lower house on June 26.