* Improved assessment of economy lifts mood * Interest rate sensitive stocks fall on rising yield * Report of Japan-India resuming talks on nuclear co-operation pact buoys By Ayai Tomisawa TOKYO, May 20 The Nikkei share average surged to a fresh 5-1/2 year high on Monday morning, buoyed by further weakness in the yen and as the Japanese government raised its assessment of the economy in May for the first time in two months. Signs of an improving U.S. economy and Wall Street's record closing high on Friday cemented the positive mood in markets. By the midday break, the Nikkei had climbed 1.4 percent to 15,347.01 after rising as high as 15,356.31, the highest since December 2007. The Nikkei has gained 48 percent this year, and it has added more than 8 percent since May 9, when the dollar broke above the 100-yen level. The government's monthly report said that economy is gradually recovering, which was an upgrade from last month, when it said the economy was showing signs of recovery but still had some weak spots. The upgrade highlights the success of Prime Minister Shinzo Abe's policies, which combine stimulus spending with aggressive monetary easing to pump-prime the economy and are resulting in a sharp weakening of the yen. Exporters were in demand, with Toyota Motor Corp rising 2.2 percent, Sony Corp jumping 5.9 percent and Komatsu Ltd advancing 2.1 percent after the dollar broke above the 103-yen level on Friday buoyed by strong U.S. consumer sentiment data. "It's not like we don't think of the possibility of a pullback given the recent rises in the market, but both domestic and overseas economies are recovering, so the market will probably keep rising," said Fujio Ando, an analyst at Chibagin Securities. Adding to the positive mood was a Nikkei report that Japan and India are expected to agree at their summit meeting this month to resume talks toward a civilian nuclear cooperation pact. Manufacturers of nuclear reactors benefited on the report, with Toshiba Corp up 3.8 percent, Mitsubishi Heavy Industries 3.2 percent higher and Hitachi Ltd rising 3.4 percent. The broader Topix added 1.4 percent to 1,270.53. "Strength in the U.S. market and signs of a recovery in the U.S. economy are serving as a tailwind to the Nikkei's further gains," said Yutaka Miura, a senior technical analyst at Mizuho Securities. Upbeat data from the United States, Japan's major export market, has helped underpin the Nikkei in recent sessions. Data on Friday showed U.S. consumer sentiment rose to its highest in nearly six years, while a gauge of future economic activity rose in April to a near five-year high. Analysts said that investors are increasingly becoming confident about the prospects for higher Japanese corporate earnings for the fiscal year through March, as the weakening yen has improved the outlook for many exporters. They expect an average operating profit rise of 30 percent from the previous year, compared with the companies' conservative forecasts of a 20 percent increase in their operating profits. Many exporters have used assumptions of around 90-95 yen to the dollar. The dollar last traded at 102.80 yen, taking a breather from its recent sharp rally, but still not far off a 4 1/2 year high of 103.32 tapped on Friday. Bucking the market, interest rate sensitive stocks lost ground after the yield on the 10-year cash bonds rose two basis points to 0.820 percent on Monday. Mitsubishi Estate Co fell 1.7 percent, Mitsui Fudosan Co dropped 2.2 percent and Sumitomo Mitsui Financial Group shed 0.5 percent
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