Nikkei hits 1-month closing high; JAL, Aiful sink

* Nikkei plays catch-up after 5-day weekend

* 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

* G20 meeting on Sept. 24-25 eyed

By Aiko Hayashi

TOKYO, Sept 24 (Reuters) - Japan's Nikkei average rose 1.7 percent to a one-month closing high on Thursday, lifted by exporters such as Kyocera Corp (6971.T) as investors played catch-up after returning from a string of public holidays.

Fast Retailing Co (9983.T) jumped after Goldman Sachs raised its rating on the stock to "buy" from "neutral", while Toshiba Corp (6502.T) climbed after Credit Suisse upgraded the stock to "outperform" from "neutral" and hiked its target price.

But Japan Airlines 9205.T and consumer lender Aiful (8515.T) continued to be dogged by negative news.

JAL tumbled nearly 16 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. [ID:nT38558]

Aiful shares plunged about 24 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. [ID:nT33949]

"Gains are due to a catch-up in the market led by short-covering in stock 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."

In active trade, the benchmark Nikkei .N225 gained 173.68 points to 10,544.22, its highest finish since Aug. 26. It slipped 0.7 percent last week.

The broader Topix .TOPX added 1.2 percent to 950.20.

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. [.N] [ID:nN23390829]

Yumi Nishimura, deputy general manager at Daiwa Securities SMBC, said the market will closely watch the Group of 20 meeting on Thursday and Friday, though few surprises are expected.

Leaders of the G20 countries meet in Pittsburgh in the United States, their third gathering since the collapse of investment bank Lehman Brothers a year ago and with their the focus now shifting from combating the worst recession since the 1930s to discussing how to prevent it from happening again. [ID:nLH78576]

"Improvement in the macro economy has been factored in, and the focus will likely shift to corporate earnings from the latter part of next week," Nishimura said.

JAL, AIFUL TROUBLES

JAL lost 15.8 percent to 144 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. [ID:nT38558]

"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. [ID:nWNAB2629]

It tumbled 23.9 percent to 102 yen.

Uncertainty in the financial sector also hurt shares of major banks. Mitsubishi UFJ Financial Group (8306.T) fell 0.4 percent to 527 yen and Mizuho Financial Group (8411.T) shed 5.2 percent to 184 yen.

But shares of Fast Retailing shot up 5.3 percent to 11,140 yen. Goldman Sachs said concerns about fall and winter sales are unwarranted and cited the earnings potential of its operations in Asia.

Toshiba climbed 3.8 percent to 496 yen. Credit Suisse cited expectations for a major turning point for NAND-type flash chip profit structure from volatility to stability.

Exporters gained, with electronics parts maker Kyocera climbing 4.5 percent to 8,440 yen, while Honda Motor (7267.T) advanced 1.6 percent to 2,875 yen and Tokyo Electron Ltd (8035.T) jumped 5.7 percent to 5,900 yen.

Sony Corp (6758.T) gained 3.1 percent to 2,670 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. [ID:nN23396815]

Some 2.4 billion shares changed hands on the Tokyo exchange's first section, above last week's daily average of 1.9 billion.

Advancing stocks outnumbered declining ones by nearly 5 to 1. (Additional reporting by Mariko Katsumura; Editing by Chris Gallagher)