* Nikkei rises above key resistance level * Nikkei seen trading above 10,500 before SQ * Dainippon Screen jumps on inclusion in Nikkei 225 By Ayai Tomisawa and Antoni Slodkowski TOKYO, March 9 (Reuters) - Japan's Nikkei average broke above a key technical level and rose for a second day on Wednesday after a pullback in oil prices, but worries about the potential for unrest to spread in the Middle East kept investors on edge. With the settlement of Nikkei 225 futures and options coming up on Friday, moves by commodity trading advisors in futures, which have sparked big swings in the benchmark recently, are also a key focus. Despite a spike in oil prices over the last two weeks, Japanese stocks have so far proved largely resilient, with the Nikkei holding on to its 3.5 percent year-to-date gains, as investors reassessed risk within their equities portfolios instead of moving out of stocks altogether. But volume was fairly thin as some investors stayed on the sidelines ahead of the Nikkei 225 futures and options settlement, known in Japan as the special quotation or "SQ", which is calculated from the opening prices of the 225 shares on the Nikkei on the second Friday of the month. "Short-term investors are actively trading futures before the settlement but long-term domestic investors are reluctant to trade aggressively in the cash market before the fiscal year ends this month," said Hideyuki Okoshi, general manager at Chibagin Securities. The benchmark Nikkei rose 0.6 percent or 64.31 points to 10,589.50. The broader Topix index also gained 0.6 percent, to 944.29. The Nikkei had earlier traded above its closely watched 25-day moving average, which is now at 10,627.77. Dainippon Screen Mfg jumped 4.6 percent to 839 yen after the publisher of the Nikkei 225 said it would be added to the benchmark later this month. Dai-ichi Life Insurance and Yaskawa Electric Corp will also be added. Dai-ichi Life rose 1.3 percent to 152,200 yen while Yaskawa rose 2.6 percent to 994 yen. Energy stocks, which have surged on the back of rises in oil prices, succumbed to profit-taking after U.S. crude dropped for a second day, to below $105 on Wednesday, after reassurances from OPEC members of ample spare capacity. Inpex Corp , Japan's biggest oil and gas developer, lost 1.2 percent to 578,000 yen. Investors did not buy stocks with solid fundamentals or those with strong earnings today, but concentrated on sectors which have been underweight and have high growth potential such as securities or insurance subindexes, said Makoto Kikuchi, CEO at Myojo Asset Management Japan. Nomura Holdings Inc gained 1.4 percent to 501 yen, while Daiwa Securities Group Inc added 1.2 percent to 416 yen.

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