* Nikkei plays catch-up, hits 4-week high at one stage
* Short-covering in futures leads gains -fund manager
* JAL dives after news of potential split, public fund report
* Consumer lender Aiful plunges as warns of loss
By Aiko Hayashi
TOKYO, Sept 24 (Reuters) - Japan's Nikkei average rose 1.2 percent on Thursday, lifted by exporters such as Kyocera Corp as investors played catch-up after returning from a string of public holidays.
Fast Retailing Co jumped after Goldman Sachs raised its rating on the stock to "buy" from "neutral," saying concerns about fall and winter sales are unwarranted and citing the earnings potential of its operations in Asia.
But Japan Airlines and consumer lender Aiful continued to be dogged by negative news.
JAL tumbled 12.3 percent after sources said the company might be broken up and public broadcaster NHK reported it is planning to seek a taxpayer-funded bailout to overhaul its operations.
Aiful shares plunged 17.2 percent after the lender said it would halve its workforce and slash branch numbers as it warned of a $3.4 billion loss for the year to March 2010.
"Gains are due to a catch-up in the market led by short-covering in stocks futures," said Mitsushige Akino, chief fund manager at Ichiyoshi investment Management.
"Japanese stocks couldn't keep up with gains in U.S. stocks, particularly before the holiday here, on concerns about a stronger yen. Now that the holiday is over and Wall Street didn't fall significantly during that time, investors are picking up stocks."
The benchmark Nikkei gained 122.95 points to 10,493.49, after earlier rising to 10,566.98, its highest level in about four weeks.
The Nikkei dipped 0.7 percent last week.
The broader Topix added 0.8 percent to 946.55.
U.S. stocks fell on Wednesday, dented by profit-taking and as investors worried the Federal Reserve is closer to pulling back on extraordinary measures to inject funding to shore up the economy.
The Fed's policy-setters met and kept interest rates unchanged, as expected, but they also said the U.S. central bank would slow purchases of mortgage debt to extend the programme's life until the end of March -- a move seen as a step towards a measured withdrawal of its extraordinary support for the economy during the downturn.
JAL, AIFUL TROUBLES
JAL fell to 150 yen. Earlier this week, two sources familiar with the matter said lenders to JAL may seek to split the carrier between its profitable and loss-making parts.
"Nothing's sure about JAL's future. It's already Japan's GM," said Mizuho Investors Securities analyst Takahiko Kishi.
"JAL would have to come up with really drastic restructuring to convince lenders or the government, but even if they do so, the market would doubt whether such measures could really be implemented."
Aiful, which last week asked creditors to let it push back repayments on $3 billion in debt, said it plans to cut about 2,000 jobs, or about 49 percent of the group's total workforce, by February.
It tumbled to 111 yen.
But shares of Fast Retailing Co shot up 4.1 percent to 11,010 yen.
Exporters gained, with Kyocera climbing 3 percent to 8,320 yen, while Honda Motor advanced 1.1 percent to 2,860 yen and Tokyo Electron Ltd jumped 4.3 percent to 5,820 yen.
Sony Corp gained 2.9 percent to 2,665 yen. A Sony executive said on Wednesday that sales of the PlayStation 3 video game console jumped in the weeks after a $100 price cut last month, and strong demand could lead to empty shelves at retailers. (Additional reporting by Mariko Katsumura; Editing by Joseph Radford)