* 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 on other major currencies, as speculators pocketed their dollar profits after its steep run up against the Japanese currency.
Japanese industrial production plunged 10 percent in January from the previous month, posting its biggest ever drop and underscoring the gloomy outlook which has helped drive the yen lower in the past couple of weeks.
Dealers said the data did little to change their view that yen would resume its slide once profit-taking and month-end selling by Japanese exporters to benefit from the favourable exchange rate 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 the upward trend, possibly climbing to the key 100 yen level by the end of March," said Minoru Shioiri, 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 in January and almost 10 percent against the euro, with the slide steepening after poor GDP numbers last week and resignation of the finance minister.
The dollar fell 1.2 percent on the day to 97.33 yen, after hitting a 3-½ month high of 98.72 on Thursday.
The euro fell 1.3 percent to 123.84 yen after touching a seven-week peak of 126.09 yen the previous day.
Analysts said Friday's output report and data showing Japan's core annual consumer inflation slowed to zero in January confirmed the view that the world's second-biggest economy is mired in its worst slump since World War Two.
Many see the yen heading to 100 per dollar soon.
"The selling of dollar/yen came from firms needing to make month-end currency hedges, while the economic data release earlier did not really impact the market," said a trader at a Japanese bank.
The euro eased 0.2 percent to $1.2724 as fears of a global recession prompted investors to further cut risky bets after dismal U.S. data released on Thursday.
The U.S. currency has benefited recently from a flight-to-safety bid 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 hit another record in the second week of February, with new claims at the highest level since 1982. (Additional reporting by Satomi Noguchi; Editing by Tomasz Janowski)