TOKYO, Feb 19 The Nikkei average rose 0.53 percent on Monday while the TOPIX index was ne

TOKYO, Feb 19 (Reuters) The Nikkei average rose 0.53 percent on Monday while the TOPIX index was nearing its highest in more than 15 years, as retail stocks jumped on chances of industry consolidation after Daimaru Inc. said it was considering a tie-up with Matsuzakaya Holdings Co.

Shares in Sapporo extended gains to their highest in 9 years as investors bet on white-knight bids for Japan's third-biggest beer maker to counter a $1.3 billion takeover attempt by U.S. hedge fund Steel Partners.

''The market is in a bullish mood, backed by good earnings prospects and hopes for further consolidation,'' said Takahiko Murai, general manager of equities at Nozomi Securities.

''Foreign investors have been buying shares in food and drug companies, betting that mergers and acquisitions in those sectors will accelerate,'' he said.

Shares in steel makers such as Nippon Steel Corp. also advanced on consolidation talk, making the iron and steel subindex ISTEL.the largest percentage gainer among the 33 industry sub-indexes on the TOPIX index.

The Nikkei was up 95.40 points at 17,971.05 at 0437 GMT after earlier reaching 17,974.00, its highest since May 2000.

The broader TOPIX was up 0.41 percent at 1,781.75 after rising as high as 1,782.28, nearing the high for 2006 of 1,783.72. A break above that level would take the TOPIX to its highest since November 1991.

The Bank of Japan will debate the pros and cons of raising interest rates at a two-day policy meeting that ends on Wednesday, with the decision seen as a close call.

''I expect the stock market will test the upside, regardless of whether the Bank of Japan raises rates at the meeting,'' said Murai at Nozumi Securities.

''Even if the BOJ raises rates this week, it would be just a 0.25 percent rise. And it is very unlikely the central bank will hike rates continuously in the coming months,'' he said.

Daimaru, which ranks fourth in Japan's department store sector, rose 8.2 percent to 1,818 yen after it said on Saturday it is considering forming an alliance with eighth-ranked Matsuzakaya in a deal that would create Japan's largest department store group.

Daimaru and Matsuzakaya would together have sales of about 1.17 trillion yen ($9.8 billion), surpassing current leader Takashimaya Ltd.'s 1.03 trillion yen, as well as Nos.2 and 3, Millennium Retailing and Mitsukoshi Ltd.

Shares in Matsuzakaya were untraded with a glut of buy orders at 1,073 yen, up 10.3 percent from Friday's close. Takashimaya added 1.8 percent to 1,674 yen, while Mitsukoshi climbed 4.0 percent to 573 yen.

Among other gainers, Sapporo rose 2.0 percent to 909 yen, adding to a 13 percent gain in the previous session, after media reports at the weekend that bigger rivals Asahi Breweries or Kirin Brewery may seek tie-ups with Sapporo to boost their share of the country's sluggish beer market.

In its latest report, the Nikkei business daily said it was hard to gauge the level of interest of Asahi or Kirin, and quoted an unidentified Asahi official as saying it would consider a request for a tie-up from Sapporo but that Sapporo's share price was too high.

Asahi's shares were up 1.4 percent at 2,010 yen and Kirin's stock edged up 0.4 percent to 1,918 yen.

REUTERS CS KN1128