(Updates with closing levels)

By Brigid Riley

TOKYO, June 3 (Reuters) - Japan's Nikkei share average

rose on Monday, tracking Wall Street higher as a U.S. inflation

report supported expectations for interest rate cuts in the

world's largest economy this year.

The Nikkei closed up 1.13% at 38,923.03, hitting the

psychologically significant 39,000-point mark earlier in the

session.

The broader Topix finished 0.92% higher at 2798.07.

The sentiment was up as the market reacted to the U.S.

personal consumption expenditures (PCE) price index released on

Friday, which increased 0.3% last month to match estimates,

keeping alive expectations for the Federal Reserve to cut

interest rates this year.

The Dow and S&P 500 ended higher overnight on Friday, adding

to the sense of relief in Tokyo trading hours and supporting

widespread gains in Japanese equities.

Of the Nikkei's 225 constituents, 185 advanced against 40

decliners.

The market was also adjusting after Japanese government bond

(JGB) yields hit their highest in more than a decade last week,

generating concerns about the negative impact on share prices,

said Kenji Abe, an equities analyst at Daiwa Securities ( DSECF ).

"Investors got shocked, but now they see the level of yields

... Real interest rates are still negative, so we have

accommodating market conditions and are likely to see earnings

growth going forward."

The benchmark 10-year JGB yield last hovered

at 1.06%, after rising as high as 1.1% on Thursday on bets of

further policy tightening by the Bank of Japan.

The financial sector, which tends to benefit in a higher

interest rate environment, rallied on Monday, with insurance

up 3.1% and securities gaining 3.8% to top

the Tokyo Stock Exchange's 33 industry sector sub-indexes.

Among individual stocks, Daiwa Securities Group ( DSECF )

jumped 5.6% and Nomura Holdings ( NMR ) rose about 4%.

Chip-making equipment giant Tokyo Electron ( TOELF ) climbed

1.7%, while fellow heavyweight Fast Retailing ( FRCOF ) gained

1.8%.

A handful of automaker shares fell after Japan's transport

ministry said irregularities were found in model applications

from five major auto companies. Mazda Motor ( MZDAF ) and Toyota

Motor ( TM ) led declines, down 3.3% and 1.8%, respectively.