* Japan raises economic outlook for first time in 3 years

* Yen hit as N.Korea stokes geopolitical concerns

* Canada deficit to be larger than expected

* European shares end up; U.S., British markets closed

* Oil falls toward $61 a barrel (For more on the financial crisis, click [nCRISIS])

By Patricia Zengerle

WASHINGTON, May 25 (Reuters) - 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 EURJPY=R on a day markets were quieted by holidays in Britain and the United States.

European shares closed slightly higher, with by Sanofi Aventis leading pharmaceuticals higher after winning a U.S. contract. Oil dipped toward $61 a barrel. And Canada said its federal deficit this year will be "substantially more" than the $30.1 billion (C$33.7 billion) predicted in January.