TOKYO, Oct 20 (Reuters) - Japan's Nikkei share average fell on Friday, tracking Wall Street's overnight weak finish, but the index gave up some of its losses as investors bought stocks on the dip.

The Nikkei index had fallen 0.52% to 31,266.84 by the midday break after opening at 0.85% lower. The index is set to lose 3.2% for the week.

The broader Topix was down 0.38% to 2,255.52 and on course to post a 2.2% weekly fall.

"The market opened lower but the Nikkei narrowed its losses because investors bought back stocks at declines. This has been a pattern in the recent market movements," said Jun Morita, general manager of the research department at Chibagin Asset Management.

U.S. stocks ended lower overnight after U.S. Federal Reserve Chairman Jerome Powell said that additional interest rate hikes could be warranted in view of economic resiliency and labor market tightness.

Investors were prompted to sell Japanese stocks after the yield on the benchmark 10-year U.S. Treasury note hit the 5% mark for the first since July 20, 2007.

Japan's 10-year government bond yield slipped slightly after the Bank of Japan announced measures to contain yields.

"For a while, the U.S. Treasury yields will remain as a cue for Japanese equities," said Masahiro Ichikawa, chief market strategist at Sumitomo Mitsui DS Asset Management.

Uniqlo-brand owner Fast Retailing fell 1.31% to become the biggest drag on the Nikkei. Technology start-up investor SoftBank Group lost 2.74% and air-conditioning maker Daikin Industries fell 1.34%

Bucking the trend, Daiichi Sankyo surged 12.91% after the drug maker announced a $5.5 billion agreement with Merck to jointly develop its three precision cancer drug candidates.

The drug sector jumped 2.49% to become the top performer among the 33 industry sub-indexes on the Tokyo Stock Exchange.

Nishimatsuya Chain surged 14.58% as an activist investor Effissimo Capital owned 5.63% stake in the children's clothing store operator. (Reporting by Junko Fujita; Editing by Sohini Goswami)