* Fed outlook, U.S. bank test results boost sentiment * European shares close higher, U.S. stocks choppy * U.S. dollar hits 11-month high against yen By Luciana Lopez NEW YORK, March 14 (Reuters) - The dollar climbed and U.S. Treasury yields soared to multi-month highs on Wednesday as a brighter outlook from the Federal Reserve lifted the greenback's appeal and dented that of safe-haven government debt. The greenback hit an 11-month high against the yen and one-month high against the euro. Demand for safe-haven U.S. Treasuries dropped, pushing yields to their highest level since October. A more optimistic view of the economy from the Fed late on Tuesday boosted views that the bank is edging farther from more stimulus, such as quantitative easing. The sharp selloff in Treasuries raised questions about whether prices - driven up as investors fretted about the global economy - have peaked in the face of expectations for stronger U.S. growth. While riskier currencies such as the euro firmed early this year, in part on views that such monetary easing was likely in the cards, markets shifted on Wednesday to take a more favorable view of the dollar as a buy-and-hold investment. News late on Tuesday that most U.S. banks passed a stress test added to views the world's biggest economy was gathering steam. "Equities are getting the message that they are cheap relative to bonds, which is the other side of bonds getting the message that they are extremely expensive," said Alan Ruskin, head of G10 currency strategy at Deutsche Bank in New York. Stocks in Europe closed at a near 8-month high, helped as a drop in Italy's borrowing costs at an auction. But U.S. equities were choppy after closing at multi-year highs in the previous session. The Fed said late on Tuesday it expects "moderate" growth over coming quarters, with the unemployment rate declining gradually, versus the "modest" growth the central bank said it expected in January. The Fed also said that most of the largest U.S. banks passed their annual test of how they would fare in a financial crisis, a report that underscored the recovery of the financial sector but called out a few laggards, including Citigroup Inc. "Certainly this is good news for the overall domestic financial system," said Tim Ghriskey, chief investment officer of Solaris Asset Management in Bedford Hills, New York. "It really shows banks have turned themselves around, raised capital significantly and are being much smarter and less aggressive about their capital positions, and that should give investors confidence in the system." Hints of a brighter outlook crept across the Atlantic as a slight rise in euro zone industrial production data for January ended two consecutive monthly falls and pointed toward the bloc's eventual recovery. But the impact of high oil prices kept optimism in check, weighing on growth prospects and dampening hopes that the effects of Europe's debt crisis might be easing. In contrast, economists in a Reuters poll said the U.S. economy will gain traction this year after a sluggish first quarter, even as the potential threat from higher oil prices pushes analysts to raise their inflation expectations. The dollar rose 1.03 percent to 83.71 yen. The euro weakened 0.44 percent to $1.3025, touching its lowest since Feb. 16. "It may prove a temporary phase, but at present the U.S. dollar is benefiting from higher relative yields reflecting the outperformance of the U.S. economy over other major developed economies," said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ. The benchmark 10-year U.S. Treasury note was down 44/32, the yield at 2.2812 percent. Stocks in the United States seesawed, with key indices dipping into and out of negative territory through the session. The Dow Jones industrial average gained 16.42 points, or 0.12 percent, to 13,194.10. The Standard & Poor's 500 Index dropped 1.67 points, or 0.12 percent, to 1,394.28. The Nasdaq Composite Index gained 0.85 point, or 0.03 percent, to 3,040.73. The MSCI world equity index slipped 0.2 percent. The FTSEurofirst 300 index of top European shares unofficially ended 0.3 percent higher at 1,099.09, its highest closing level in nearly eight months. Brent and U.S. crude futures fell, pressured by data showing U.S. crude stockpiles rose last week and by the dollar's strength. Brent April crude fell $1.25, or 0.99 percent, to settle at $124.97 a barrel, and U.S. April crude futures fell $1.28, or 1.20 percent, to settle at $105.43 a barrel.