* Nikkei breaks above key resistance level
* Nikkei seen trading between 10,500-10,750 before SQ
* Toyota up ahead of unveiling of long-term plan
* Dainippon Screen jumps on inclusion in Nikkei 225
By Antoni Slodkowski
TOKYO, March 9 (Reuters) - Japan's Nikkei average pierced a key technical level, extending gains for a second day on Wednesday after a pullback in oil prices, but worries about the potential for unrest to spread in the Middle East kept investors on edge.
With the settlement of Nikkei futures and options coming up on Friday, moves by commodity trading advisors in futures, which have sparked big swings in the benchmark recently, will also be in focus, market players said.
Despite a rise of around 20 percent in U.S. oil prices over the last two weeks, Japanese stocks have so far proved largely resilient, with the Nikkei holding on to its 4 percent year-to-date gains, as investors reassessed risk within their equities portfolios instead of moving out of stocks altogether.
"The market is posting strong gains today, but the feeling is that it will stay under pressure and vulnerable to sudden changes in sentiment sparked by changes of the situation in the Middle East," said Yumi Nishimura, a senior market analyst at Daiwa Securities Capital Markets.
She said the Nikkei would likely trade between 10,500 and 10,750 ahead of Friday's settlement, known in Japan as the special quotation or "SQ", which is calculated from the opening prices of the 225 shares on the Nikkei on the second Friday of the month.
By midmorning, the benchmark Nikkei rose 1.3 percent, or 133.52 points, to 10,659.55. The broader Topix index gained 1.3 percent to 951.07. It broke above its 25-day moving average, key technical level closely watched by Japanese traders, now at 10,630.45.
Toyota Motor Corp climbed 1.4 percent to 3,750 yen. A source said it will forecast a minimum operating profit of 1 trillion yen ($12.1 billion) and a profit margin of 5 percent in two to three years as part of its business strategy to be unveiled on Wednesday.
Investors were also snapping up shares of stocks previously shorted due to worries over oil, such as blue-chip exporters and carmakers. Honda Motor added 1.2 percent to 3,465 yen.
Shares of Dainippon Screen Mfg jumped 4.5 percent to 838 yen after the publisher of Nikkei 225 said it would be added to the benchmark later this month.
Dai-ichi Life Insurance and Yaskawa Electric Corp will also be added. Dai-ichi Life rose 1.6 percent to 152,600 yen while Yaskawa rose 1.4 percent to 983 yen.
Oil-sensitive stocks, such as Japan's biggest oil and gas developer, Inpex Corp, which have surged on the back of advances made by oil, succumbed to profit-taking after Brent Crude dropped nearly 2 percent on Tuesday.
Inpex lost 1.2 percent to 578,000 yen.
Vantec Corp spiked 23 percent to 143,000 yen after the Nikkei business daily reported Hitachi Transport System Ltd aims to take a majority stake in the automotive logistics service provider through an imminent tender offer..
Hitachi Transport's shares also outperformed the rise on the Nikkei, adding 2.2 percent to 1,305 yen. (Editing by Edwina Gibbs)