UPDATE 1-Australia's ASX forecasts Q2 earnings recovery

* Australian bourse sees recovery in activity in Q1

* Says cash earnings growth in Q2 if momentum continues (Adds background on regulatory proposals, shares)

SYDNEY, Sept 30 - The Australian Securities Exchange <ASX.AX>, the country's bourse operator, is forecasting a return to earnings growth in the second quarter if momentum in the current quarter is maintained.

In comments to its annual shareholder meeting, ASX Managing Director Robert Elstone said there had been an extension of a recovery trend in equity and futures market activity first seen in the last quarter of 2009.

"As long as first quarter activity momentum levels are maintained we would expect to return to a cash earnings growth trajectory during the second quarter of fiscal 2010," Elstone said.

The Australian share market is enjoying a rally in tandem with a rise in sentiment and a strengthening economy.

The benchmark S&P/ASX index <.AXJO> ended Tuesday at its highest level in a year and has risen about 28 percent this year. It is on course for its best quarterly gain in 22 years, according to broker Commsec.

ASX shares were trading up 0.2 percent at A$34.91 at 0109 GMT in a broader market that was little changed.

Last month, the Australian government said that its regulator, the Australian Securities and Investments Commission (ASIC), would take over the supervision of trading in the nation's financial markets.

Elstone said it was too early to provide guidance on the likely impact on earnings of the transfer of some regulatory functions to ASIC. It will be accounted for as a significant, non-recurring item in fiscal 2010.