(Updates with closing levels)

By Brigid Riley

TOKYO, Aug 7 (Reuters) - Japanese shares ended higher on

Wednesday in a rollercoaster week of double-digit losses and

gains that led the Bank of Japan's deputy governor to reassure

investors there would be no interest rate rises amid market

volatility.

Fears of U.S. recession risks and the unwinding of

investments funded by a cheap yen sparked market stress, and a

hawkish turn by the Bank of Japan (BOJ) last week raised alarm

about how fast the central bank would tighten monetary policy.

BOJ Deputy Governor Shinichi Uchida addressed concerns on

Wednesday, saying it won't hike rates when financial markets are

unstable, sending the yen tumbling.

The Nikkei, which had fallen over 2% during early

trade, rallied on the deputy governor's remarks to rise more

than 3%. It closed up 1.19% at 35,089.62.

The broader Topix finished 2.26% higher at

2,489.21.

The moves follow a 10% jump in the Nikkei on Tuesday, its

third biggest one-day percentage gain, as the index clawed back

most of its losses from Monday's 12% plummet.

The double-digit plunge was the market's biggest single day

rout since the 1987 Black Monday crash.

"As we're seeing sharp volatility in domestic and

overseas financial markets, it's necessary to maintain current

levels of monetary easing for the time being," Uchida said in a

speech to business leaders in the northern Japan city of

Hakodate.

While the yen had appreciated again since reversing on

Tuesday from a seven-month peak hit at the beginning of the

week, it slumped against the dollar following Uchida's remarks.

"His comments have become a trigger for slowing down the

pace of unwind in the yen's carry trade," said Kentaro Hayashi,

senior strategist at Daiwa Securities.

The Nikkei's moves are not directly driven by yen carry

trades. However, a rising or volatile yen impacts corporate

earnings and influences decisions by Japanese retail and

institutional investors on allocations to their home markets.

MARKET ON EGGSHELLS

The BOJ's latest communications appeared to go over

favourably with markets, and comments from Federal Reserve

officials this week and more economic data have also soothed

some concerns about the risk of a sharp economic downturn in the

United States.

Wall Street's three main stock indexes edged up on

Tuesday.

But market players will be keeping a vigilant eye on

developments and investor confidence is likely to remain fragile

for the time being.

"Volatility will remain high, with a side-way underlying

trend as market expectations alternate between U.S. soft and

hard landing scenarios," said Chi Lo, senior market strategist,

Asia Pacific, at BNP Paribas Asset Management.

Analysts said markets will be highly sensitive to any

changes in job growth and inflation indicators going forward.

Given the BOJ's rate hikes and prospects that the Fed

may cut rates as soon as September, policy divergence may also

weigh on Japan's stock market, said BNP Paribas Asset

Management's Lo.

But beyond near-term volatility, the direction of

Japanese equities depends a lot on whether BOJ allows the

virtuous inflation cycle to play out, he added.

"If the BOJ remains accommodative despite policy

normalisation ... the Japanese stock market's longer-term

outlook should remain benign."

Among individual shares on Wednesday, the largest

percentage gainers in the Nikkei were Disco Corp ( DISPF ), up

12.4%, followed by Japan Steel Works ( JPSWF ), which gained

11.63%, and Sumitomo Mitsui Financial Group ( SMFG ), up 10.24%.

Heavyweight SoftBank Group ( SFTBF ) rallied 5.2% to give

the index the largest lift.

The banking sector, which was one of the worst

hit among the Tokyo Stock Exchange's 33 industry sub-indexes

during Monday's slump, surged 7.9%.