* JGBs sag as dealers sell ahead of a 10-yr sale on Tuesday

* Some also sell to prevent lowest 10-yr coupon since 2005

* 2-yr/10-yr spread pulls back from 5-mth low hit on Friday

* JGBs underpinned as Nikkei dips to a 11-week closing low

Japanese government bonds dipped on Monday and 10-year futures pulled back from a six-month high as market players sold to hedge and make room for a 2.1 trillion yen ($23 billion) 10-year auction the next day.

Losses were limited by the murky economic recovery outlook following weaker-than-expected U.S. jobs data last week that pushed Tokyo's Nikkei stock average .N225 down to an 11-week closing low. [.T]

December 10-year futures 2JGBv1 fell 0.11 point to 139.50 after hitting a six-month high of 139.70 on Friday.

JGBs saw a futures-led decline as dealers sold to make room for and hedge against tomorrow's 10-year sale. Cash activity was relatively subdued, said Naomi Hasegawa, a senior fixed-income strategist at Mitsubishi UFJ Securities.

Following last week's JGB bull run that took the current 10-year yield JP10YTN=JBTC to its lowest point in almost eight months at 1.245 percent, some dealers sold to prevent a 1.2 percent coupon being set on the 10-year paper to be offered on Tuesday.

That would be the lowest coupon since July 2005.

Market watchers said investors 1.3 percent, set as recently as April, would be better-received by investors as it would only be 10 basis points lower than the 1.4 percent offered at the auction in September.

The auction will be a test of investor demand and how far banks are willing to go down the curve, said Kazuhiko Sano, chief strategist at Citigroup Global Markets Japan.

The yield curve is expected to continue bull-flattening during the new fiscal half on ample investor demand. It is not possible to predict the future, but there is potential for a good auction.

Flush with cash thanks to the Bank of Japan's easy monetary policy and subdued demand for loans, domestic banks have been heavy buyers of short and midterm JGBs.

With two- and five-year yields recently hitting four-year lows, these investors have been extending their buying to bonds of longer maturities in search of higher yields.

The two- to 10-year yield spread eased a touch to 102.5 basis points after tightening to a five-month low of 102 basis points on Friday.

The 20-year yield JP20YTN=JBTC rose half a basis point to 2.02 percent. The benchmark 10-year yield also edged up 1 basis point to 1.260 percent JP10YTN=JBTC.

The five-year yield JP5YTN=JBTC rose 1 basis point to 0.565 percent, pulling back from a four-year low of 0.555 percent struck on Friday.

The two-year yield rose half a basis point to 0.235 percent JP2YTN=JBTC. It fell to a four-year low of 0.200 percent in mid-September.

Data released on Friday showed U.S. employers cut a surprise 263,000 jobs in September, marking the 21st straight monthly decline and helping lift the unemployment rate to a 26-year high of 9.8 percent from 9.7 percent in August. [ID:nN02314318]

The G7 meeting of central bankers and finance ministers at the weekend had a limited impact on JGBs as it brought little surprises. The bond market, however, will continue to keep an eye on comments from the international community regarding currencies, analysts said.

The G7 gave no sign of breaking new ground in resolving tensions among its members over the weakness of the dollar. [ID:nL3421338].

The yen's recent appreciation against the greenback to an eight-month high has helped JGBs advance by dampening recovery hopes for the domestic economy and fanning deflation concerns. (Reporting by Shinichi Saoshiro; Editing by Hugh Lawson)