UPDATE 2-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 after results,broader market up 0.8 pct (Recasts, adds buyside comment, details)

TOKYO, Oct 26 - JFE Holdings Inc, the world's No.6 steelmaker, returned to quarterly profit and stuck to an annual outlook that some called conservative as government stimulus moves lead a strong revival of exports and car sales.

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.

"Its full-year forecast seems a little conservative given that steel demand for cars is rising," said Kazuyuki Terao, chief investment officer at RCM Japan Co.

"But we cannot become bullish as Korean steelmakers are scheduled to raise their output next year."

Japanese steel mills' profits will also 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 counterparts.

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 with a consensus estimate of a profit of 47.9 billion yen in a poll of 18 analysts by Thomson Reuters I/B/E/S.

JFE Executive Vice President Kohei Wakabayashi told reporters the company has kept its outlook for crude steel output at 13 million tonnes for the second half, or up from 12 million tonnes in April-September.

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.

After the results were announced, JFE hit an intraday low of 3,110 yen before ending down 2.2 percent at 3,130 yen. The main Nikkei average rose 0.8 percent.