(Reuters) Japan's Nikkei average closed at its highest level in more than two months on Friday, with investor sentiment riding high on encouraging results from U.S. banks, while near-term concerns over Europe eased after solid demand at debt auctions.

Financial shares advanced in Tokyo after upbeat earnings from Morgan Stanley (MS.N) and Bank of America (BAC.N) further confirmed the strength of the U.S. economic recovery despite headwinds from Europe's sovereign debt crisis.

Japan's top brokerage Nomura Holdings (8604.T) jumped 5.2 percent and rival Daiwa Securities Group (8601.T) added 6.2 percent.

The three major Japanese banks were among the heaviest traded shares by turnover on the main board, with Mizuho Financial Group (8411.T), Mitsubishi UFJ Financial Group (8306.T) and Sumitomo Mitsui Financial Group (8316.T) up between 4.3 and 5.5 percent.

Japan's financial shares are mirroring the broader market, as investors who had previously consolidated their positions in defensives are buying back shares that were heavily sold off last year, said Ryota Sakagami, chief strategist of equity research at SMBC Nikko Securities.

The Nikkei .N225 added 1.5 percent to 8,766.36 and gained 3.1 percent for the week. The next major targets for the benchmark are its 200-day moving average near 9,115 and its high from last October's rally of 9,152.39.

The Nikkei has jumped through major resistance levels, first the 25-day (moving average), the 75-day and the upper limit of the Ichimoku cloud, pushed up by blue chips ... There is a feeling that it may be able to test the 9,000 level sometime soon, said Toshiyuki Kanayama, senior market analyst at Monex Inc.

The broader Topix .TOPX rose 2 percent to 755.47, as advancing shares outnumbered declining issues 1,281 to 291.

POSITIVE MOOD

Despite Standard & Poor's massive downgrades last week, Europe has so far passed key tests of investor confidence for euro zone bonds.

Spain on Thursday sold more longer-term debt than hoped, while France raised funds at lower yields in its first auction since S&P stripped the country of its prized triple-A status.

Debt auctions in Europe have been cleared without drama thanks to the European Central Bank's three-year operation and I do think that anxiety about Europe is subsiding somewhat as it clears each hurdle, said Hideyuki Ishiguro, assistant manager of investment strategy at Okasan Securities.

If you look at gains of the core 30 and the increasing trading volume, you can see that foreign investors are returning to the market and there is new money coming in, he said.

Trading volume hit a six-week high on Friday, with 2.6 billion shares changing hands on the main board, up from 2.13 billion shares on Thursday.

Battered real estate firms made a comeback on Friday, with the subindex for the sector .IRLTY.T jumping 5.7 percent to become the top percentage gainer on the main board.

Developers Mitsui Fudosan Co (8801.T) surged 7 percent and Mitsubishi Estate Co (8802.T) gained 6.3 percent.

Real estate and other blue chips are strong today as market sentiment in Japan is improving and investors are switching from small-cap stocks to major names that were oversold recently, said Monex Inc's Kanayama.

Deutsche Bank said on Friday that Japan's condominium market continued to recover after last year's tsunami and earthquake with existing condo sales rising 4.9 percent in October, their first increase in eight months.

Real estate sector stocks have performed poorly as investors seem to have ignored the steady recovery in the real estate market since 2009. We think any further decline in sector share prices to be limited and expect real estate stocks to start rising as investors confirm current fundamentals, they said.

While they picked up blue chips, investors dumped small-cap stocks of reconstruction-related companies on profit-taking.

Japan Bridge (5912.T), the biggest percentage loser on the main board, dropped 18.3 percent after gaining nearly 253 percent so far this month after a report that the Metropolitan Expressway Company planned to spend 1 trillion yen ($13 billion) to upgrade its infrastructure.

Tobishima Corp (1805.T), a general contractor involved in large-scale civil engineering projects, slid 11.4 percent after three straight sessions of double-digit gains.