UPDATE 1-JFE returns to quarterly profit, keeps outlook

* Q2 recurring profit 9.8 bln yen vs 146.51 bln yen year ago

* Annual outlook still lags market consensus

* Shares down 2.2 pct, broader market up 0.5 pct (Adds details)

TOKYO, Oct 26 - JFE Holdings Inc, the world's No.6 steelmaker, reported a return to quarterly profit on Monday on a strong revival of exports and car sales following government stimulus moves, but stuck to its annual outlook.

Asia's steelmakers are expected to see sequential earnings growth by the end of this year helped by an upturn in demand and lower input costs, although earnings momentum could slow in the current quarter due to oversupply in China.

China's near-$600 billion package focused on infrastructure prompted a spurt in exports by JFE, Nippon Steel and POSCO to capture demand, while government incentives and tax breaks on hybrid cars helped raise output at companies such as Toyota Motor Corp and Hyundai Motor Co.

But Japanese steel mills' profits will stay sharply lower than their Asian peers this financial year due to huge inventory writedowns, booked mostly in April-June, stemming from annual changes in raw materials costs.

They use more stringent asset impairment accounting rules than Asian peers.

JFE, which competes with world No.2 Nippon Steel, third-ranked Baoshan Iron and Steel and No.4 POSCO -- said it booked 9.8 billion yen in recurring profit before tax and special items in July-September, compared with a profit of 146.51 billion yen a year ago.

The worst industry slump in decades and inventory writedowns pushed JFE into a loss of 67.26 billion yen in the previous quarter ended June 30.

The company stuck to a recurring profit forecast of 40 billion yen for the full year to March 2010, compared to a consensus estimate of a profit of 47.9 billion yen in a poll of 18 analysts by Thomson Reuters I/B/E/S.

While Japan's crude steel output is expected to recover to a level near last year's in the current quarter, exports and car production remain the sole bright spots in the sector.

The key domestic construction sector remains weak, while demand from machinery makers remains nearly 40 percent below last year's levels as manufacturers cut back on capital spending.

"It's still hard to predict whether the market is going up or down in the January-March quarter," Shoji Muneoka, president of Nippon Steel, told a news conference last week, citing worrying factors such as the yen's exchange rate.

Shares in JFE, which has strong exposure to Asia's export markets, have risen 37 percent this year, sharply outperforming bigger rival Nippon Steel's 23 percent gain.