* Yen rebounds sharply vs dollar, euro after steep losses
* Speculators cash in on gains from dollar's recent rise
* Japan output falls 10 pct in January, confirms gloomy view
By Rika Otsuka
TOKYO, Feb 27 (Reuters) - The yen rose sharply on Friday, rebounding from a 3-1/2-month low against the dollar and gaining against other major currencies as speculators pocketed dollar profits after its steep run-up against the Japanese currency.
The yen also gained a reprieve as Japanese exporters sold foreign currencies for the yen before the month's end.
But Japanese data continued to paint a gloomy picture of the economy, dampening prospects of a sustained yen rebound.
Japanese industrial production plunged 10.0 percent in January from the previous month, posting its biggest drop on record and underscoring the sombre outlook that has helped drive the yen lower in the past couple of weeks.
Dealers said the data did little to change views that the yen would resume its slide once profit-taking and month-end selling by Japanese exporters, to benefit from the favourable exchange rates, had worked its way through.
"We cannot overlook the fact that the dollar has risen to levels that most market participants had not expected. That means the dollar remains on an upward trend, and could climb to the 100 yen level by the end of March," said Minoru Shioiri, a senior manager of forex trading at Mitsubishi UFJ Securities.
The yen has fallen nearly 11 percent against the dollar since hitting a 13-year high of 87.10 yen in January, with the slide steepening after poor GDP numbers last week and the resignation of the finance minister after he was forced to deny being drunk at a G7 meeting.
The yen rose 0.8 percent to 97.58 per dollar on Friday, after hitting a 3-½ month low of 98.72 on trading platform EBS on Thursday.
But on a monthly basis the dollar is on course for a rise of nearly 9 percent on the yen, its biggest monthly gain in percentage terms since 1995.
The euro fell 0.9 percent to 124.18 yen after touching a seven-week peak of 126.09 yen the previous day. The single currency has climbed roughly 8 percent versus the yen in February.
Sterling lost 1.1 percent to 139.15 yen and the Australian dollar shed 1.4 percent to 62.88 yen.
On charts the dollar has broken some key levels, spurring this week's rally against the yen. But Thursday's peak just below 99.00 yen represented a milestone for those looking to take profits, as it was a retracement of almost half the dollar's fall from an August high to January's low.
DOLLAR AND U.S. DATA
The euro was flat at $1.2724.
The U.S. currency has benefited recently from flight-to-safety bids due to worries about the outlook for the global economy.
U.S. government data showed on Thursday that sales of newly built single-family homes slumped in January to the lowest since at least 1963, while prices fell to the weakest level in five years, highlighting the continued distress in the U.S. housing market.
Other reports showed U.S. durable goods orders fell for a sixth consecutive month to a six-year low in January, while the number of U.S. workers claiming jobless benefits notched a fresh record in the second week of February, with new claims at the highest level since 1982.
Poor economic fundamentals in the United States have so far funnelled safe-haven flows into the dollar, but the market focus is on whether the greenback can continue to hold up if more data points towards a deepening recession.
"Key indicators out of the United States next week are widely expected to be weak, and that could slow the dollar's advance," said Takahide Nagasaki, chief forex strategist at Daiwa Securities SMBC.
"None of the key currencies look appealing as all the major economies are struggling. It's about which currency appears the least attractive, a status that currently belongs to the yen, but the dollar's standing could next weaken if data continues to disappoint," he said. U.S. indicators due next week include manufacturing and non-manufacturing ISM indexes, factory orders and non-farm payrolls. (Additional reporting by Shinichi Saoshiro and Satomi Noguchi; Editing by Michael Watson)