Japan raised its economic outlook for the first time in three years on Monday, and an important measure of German business sentiment rose in May in further signs the worst of the global recession may be over.

But news of North Korea's second nuclear test, of a significantly more substantial device than in a first test in October 2006, stoked geopolitical concerns, hitting the yen on a day markets were quieted by holidays in Britain and the United States.

European shares <.FTEU3> turned positive after dropping on concerns about the auto industry. Oil dipped toward $61 a barrel.

In a further sign frozen financial markets are thawing, India's top mobile telephone operator, Bharti Airtel , unveiled a plan to buy 49 percent of South Africa's MTN Group as part of what it said was a $23 billion deal.

North Korea's nuclear test was condemned by global leaders.

North Korea's nuclear and ballistic missile programs pose a grave threat to the peace and security of the world, and I strongly condemn their reckless action, U.S. President Barack Obama said. Germany, Britain and France were also among nations condemning the test, which trigged an emergency U.N. Security Council meeting.

But European and Asian stock markets generally shrugged off news of the nuclear test and missile launches, as investors focused on company news in thin trading.

Analysts said the test was more a negotiating tactic than an imminent threat to security on the peninsula.

GERMANY OPTIMISM

German think tank Ifo's business climate index, based on a poll of 7,000 firms, rose to 84.2 in May from 83.7 in April but below a consensus forecast for 85.0, cheering investors even as it underscored the weakness of current business conditions.

This is a further clear signal that the German economy's tailspin has ended. The recession has lost its velocity. It could even be over by the autumn, Commerzbank economist Joerg Kraemer said. No one should overestimate the strength of the upturn. It will be an expansion without any real power, he added.

In Tokyo, the government raised its outlook for Japan's economy for the first time in three years, saying the pace of recession was slowing as exports and industrial output appeared to be near the bottom.

Previously, the government had said the economy was worsening rapidly and in a severe state.

Bank of Japan governor Masaaki Shirakawa also said both the Japanese and world economies appeared to be bottoming out but any recovery would be mild because it would take time to get rid of boom year excesses.

European Central Bank governing council member and German Bundesbank president Axel Weber said there were growing signs the economic decline in Germany and euro zone was ebbing.

But those signs were sporadic and should not be overplayed, although the impact of government stimulus programs would hopefully build through the rest of the year, he said.

There is definitely hope that the euro zone economy will gradually stabilize in the later part of 2009.

Joaquin Almunia, the EU's economic and monetary affairs commissioner, said European banks need more recapitalization than U.S. banks and should be subjected to stress tests along the lines of those conducted by Washington.

Market regulators in China and Australia said they would relax restrictions imposed during the worst of the financial crisis, suggesting they think the market recovery is on solid ground.

OIL DOWN

Oil prices fell toward $61 a barrel, before an OPEC meeting in Vienna on Thursday at which ministers were expected to make no change to oil supply. News that Nigerian militants breached an oil pipelines in the Niger Delta failed to push prices higher.

Thai officials also said the worst may be over after data showed Thailand's economy shrank a larger-than-expected 1.9 percent in the first quarter, dragging the country into its first recession in a decade after a plunge in exports.

In the United States, the Federal Reserve is likely to keep interest rates near zero for a while, Fed Vice Chairman Donald Kohn said over the weekend.

The economy is only now beginning to show signs that it might be stabilizing, and the upturn, when it begins, is likely to be gradual amid the balance sheet repair of financial intermediaries and households, Kohn said.

Equity markets have stalled since hitting 2009 highs last week on worries that recent powerful gains might have outpaced signs the global economic slump was abating.

(Additional reporting by Reuters correspondents around the world; Editing by Andrea Ricci)

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