* Otsuka Holdings dives to more than 1-month low after M&A news * Technical chart shows market is overheated * BOJ bought 37.4 billion yen worth ETFs on Tuesday * Underlining sentiment strong, may see year-end rally - analyst By Ayai Tomisawa TOKYO, Dec 3 (Reuters) - Japan's Nikkei share average rose to a more than seven-year high on Wednesday after Wall Street gained and the dollar hit a fresh seven-year high against the yen, but Otsuka Holdings tumbled on news that it will buy a U.S. drugmaker for about $3.5 billion.

The Nikkei 225 gained 1.2 percent to 17,881.76 points by mid-morning, the highest level since July 2007.

Market observers said there are signs that Japanese shares are overheated, with the toraku ratio, or up-down ratio, rising above 142. A level above 120 signals an overbought market.

The ratio is calculated by dividing the 25-day moving average of stocks on the Tokyo Stock Exchange's first section that gained by the 25-day average of those that fell.

"It is possible that the market may soon see a short-term correction," said Takuya Takahashi, a strategist at Daiwa Securities, adding that a trigger could involve macro-related reasons such as a weak overseas economic figure.

But he added that underlining sentiment remains positive, with expectations that Prime Minister Shinzo Abe will win the upcoming election and push economic reforms, while the recent weakening in crude oil prices may help lift the country's consumption.

"We expect the market to see an year-end rally for the third straight year," Takahashi said.

Traders said that the Bank Of Japan's move on Tuesday to purchase 37.4 billion yen of exchange-traded funds (ETFs)lifted the mood as well.

"That (BOJ's ETF buying) gives investors comfort that the markets will be supported and the momentum continues to be up," said a senior trader at a foreign brokerage.

Exporters were stronger after the dollar rose to 119.33 yen during Asian trade, its highest level since August 2007. Panasonic Corp rose 2.3 percent and Toyota Motor Corp added 1.4 percent, which was also helped by strong U.S. auto sales.

Otsuka Holdings dived as much as 5.6 percent to a more than one-month low after saying it will buy U.S.-based Avanir Pharmaceuticals Inc for about $3.5 billion to expand its neurologic drug portfolio ahead of an expiration of a key drug patent. Investors felt the price was too high.

The broader Topix gained 0.7 percent to 1,438.36, and the JPX-Nikkei Index 400 added 0.7 percent to 13,074.00.

(Editing by Kim Coghill)