* Nikkei closes at highest since March 11, volume at 2-week high
* Breaks 200-day moving average, investors eye 10,000
* Outlook on Japan's output helps sentiment
By Ayai Tomisawa
TOKYO, April 28 (Reuters) - Tokyo stocks climbed 1.6 percent on Thursday to their highest level since last's month earthquake, helped by better-than-expected domestic earnings and strength in U.S. shares after the Federal Reserve pledged to hold short-term rates near zero.
Strong earnings reports this week from Japanese manufacturers, such as the world's No.2 construction machinery maker Komatsu , prompted active short-covering, especially after the Nikkei broke through its 200-day moving average of 9,814.
Volume picked up to the highest level in two weeks, with 2.18 billion shares changing hands on the Tokyo Stock Exchange's first section.
Market turnover rose for the third straight session after slumping to this year's lowest level of 1.46 billion shares on Monday.
"Earnings and a rise in overseas shares are key factors that boosted shares prices today. The market especially may have factored in the worst for manufacturers from their earnings reports," said Hideyuki Ishiguro, a supervisor at Okasan Securities.
"Better-than-expected earnings have prompted short-covering after convincing gains seen over the past two days," he said.
Ishiguro said a recovery in shares such as Canon , the world's top digital camera maker, encouraged views that parts procurement woes were set to be resolved in a few months.
The benchmark Nikkei average closed the day up 157.90 points at 9,849.74 -- the highest since March 11.
The broader Topix rose 11.98 points or 1.4 percent to 851.85.
Bright signs in Japanese output data also encouraged to induce solid short-covering, fund managers said.
"Sentiment is turning positive. Today's industrial output data may have helped the market as it showed bright signs in the outlook," said Ryosuke Okazaki, chief investment officer at ITC Investment Partners.
"The situation doesn't look as bad as after the Lehman shock, when production fell steadily. Many auto makers and other manufacturers are giving their production schedule. We are seeing problems in supplies, but demand is there."
Okazaki said the Japanese market also benefited as Wall Street shares advanced strongly on relief that Federal Reserve Chairman Ben Bernanke's comment did nothing to short-circuit investors' optimistic outlook on the economy.
Industrial output fell 15.3 percent in March, more than a median market forecast of an 11 percent drop and exceeding the previous record decline marked during the Lehman crisis in 2009, data from the Ministry of Economy, Trade and Industry showed earlier.
But manufacturers surveyed by the ministry expect output to rise 3.9 percent in April and 2.7 percent in May.[ID:nL3E7FR5E4]
With the Nikkei having broken through the 200-day moving average, investors may test it above another important chart level of 10,000 in the near term.
"The strength in New York prices helped the Nikkei. Technical sentiment for the Nikkei is improving, but we'll face a tough psychological barrier at 10,000," said Yutaka Miura, a senior technical analyst at Mizuho Securities.
Miura said the market turned nervous about taking additional positions as Japanese markets enter the Golden Week holiday period on Friday.
Komatsu Ltd rose 2.8 percent to 2,840 yen after it doubled its quarterly operating profit and forecast further gains this year as it taps fast-growing demand in China and sees a continued recovery in the United States and Europe. (Additional reporting by Chikafumi Hodo; Editing by Michael Watson)