Australia shares strengthen on month-end settlements

* Shares (Berlin: DI6.BE - news) up 1.25 pct

* Down 1.8 pct quarter-to-date

* Set for best weekly performance in over 2 months

* 152 shares up, 40 down, 6 unchanged (Adds analysis, quotes, stocks on the move)

By Pauline Askin and Naomi Tajitsu

SYDNEY/WELLINGTON, May 29 (Reuters) - Australian shares returned to the black on Friday after two days of falls as investors adopted a cautious "buy on dips" strategy with broad-based gains across all sectors as the month came to a close.

Banks led Friday's rally with the S&P/ASX 200 index hitting a three week high, rising to 5,803.0 points in early deals. By 0219 GMT, the benchmark was up 66.8 points or 1.2 percent to 5,779.9. It fell 0.2 percent on Thursday.

The index is set to post its best weekly performance since March 20.

However, analysts are pessimistic about the outlook for the index which has fallen for two consecutive months as the mining boom, which powered the Australian economy for a decade, fades.

The index is set for another monthly dip in May.

"I think you've got to take today with a pinch of salt, which is a lot of people closing their books. Come Monday it will be a very different picture," Evan Lucas, Market Strategist IG (LSE: IGG.L - news) said.

Commonwealth Bank of Australia (Other OTC: CBAUF - news) rose 2.7 percent and National Australia Bank up 2 percent. The mining sector rose with BHP Billiton (NYSE: BBL - news) up 0.9 percent while Rio jumped 1.8 percent.

Drug developer Alchemia Ltd slumped 53 percent to a record low of A$0.035

Despite new housing sales for April hitting a 10 year high, property stocks such as Novion Property and Federation Centres lurked mainly in the red.

Australian businesses investment suffered the largest fall in over six years last quarter.

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U.S. stocks eased on Thursday as mixed messages about Greece's debt talks kept investors uncertain, as did a sharp drop in Chinese shares after brokers tightened margin rules.

New Zealand's benchmark NZX50 share index rose 47.3 points or 0.8 percent to 5,825.9, tracking gains in offshore markets while healthcare-related shares rallied after Fisher and Paykel Healthcare posted a record-high profit for the year.

The medical equipment maker climbed 5.4 percent after it reported a 17 percent jump in full-year profit and lifted its dividend as its annual performance exceeded its guidance.

Strong earnings at healthcare-related companies continued to boost the sector, with retirement village operator Ryman Healthcare rising 1.9 percent after it reported an ongoing rise in profit earlier in the month.

Telecommunications retailer Spark rose 1.1 percent, extending its recover from a one-year low hit earlier in the week. (Additional reporting by Swati Pandey; Editing by Eric Meijer)