TOKYO, Dec 12 (Reuters) - Japan's Nikkei share average

hit a two-month high on Thursday, tracking Wall Street's

strength, as an in-line U.S. inflation report boosted

expectations of a Federal Reserve interest rate cut this month.

The Nikkei crossed 40,000 for the first time since

Oct. 15, rising to as high as 40,0091.51, before ending the

morning session 1.29% higher at 39,881.1.

The broader Topix climbed 1.03% to 2,777.55.

"U.S. inflation data convinced the market that the Fed will

cut rates at its meeting next week," said Yugo Tsuboi chief

strategist at Daiwa Securities.

A Labor Department report showed U.S. consumer prices in

November increased by the most in seven months, though broadly

in line with market expectations.

Wall Street's benchmark S&P 500 index advanced overnight and

a rally in tech stocks, following the inflation data, lifted the

Nasdaq above the 20,000-point milestone for the first time.

The Bank of Japan (BOJ) will announce its policy decision

next week and the market has priced in a rate hike by January,

said Tsuboi.

"Whether the BOJ raises rates this month or next month, the

market is unlikely to make a drastic move like in August."

Chip-related stocks gained, with Advantest ( ADTTF ) jumping

4.2% to become the biggest boost for the Nikkei. Tokyo Electron ( TOELF )

added 0.7%.

Uniqlo owner Fast Retailing ( FRCOF ) rose 1.46%.

($1 = 152.2200 yen)