* Momentum from EU decision continues to buoy stocks * Cyclical shares such as shippers in favour * Analyst said he had expected bigger gains By Sophie Knight TOKYO, July 2 (Reuters) - Japan's Nikkei share average edged up in early trade on Monday, extending gains made after euro zone leaders agreed to stabilise the region's banks and also helped by data showing Japanese manufacturing sentiment has improved. Trading companies, steel and shipmakers were in favour while defensive shares such as pharmaceuticals were given the cold shoulder. "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. The Nikkei rose 0.3 percent to 9,033.36 and a 50 percent retracement of its fall from March 27 to June 4 would take it to 9,243. The gains build on Friday's 1.5 percent advance to above the 9,000 for the first time in 7 weeks but the benchmark index still ended the second quarter down 10.7 percent, its worst quarterly performance since last year's July-September period. The broader Topix index also put on 0.3 percent, to 772.08. 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 2.1 percent and Tokyo Steel Manufacturing Co Ltd rising 2.4 percent. The shipping sector was the biggest outperformer with Nippon Yusen putting on 3.4 percent and Kawasaki Kisen Kaisha Ltd gaining 1.9 percent. Data from China showing industrial activity at its lowest level for seven months at the weekend was offset by the euro zone leaders' agreement that the region's banks can be recapitalized directly from a rescue fund without adding to government debt. "The Chinese news is disappointing but it was also expected, and I don't think it will affect market sentiment too much," said Toshiyuki Kanayama, senior market analyst at Monex Inc. "The Nikkei breaking above its 200-day moving average of 8,942.99 was a kind of confirmation that we are on an upwards swing." Investors are now looking toward a European Central Bank meeting on Thursday, with the market expecting the bank will cut its main refinancing rate and that it may reduce its deposit rate.