* Q1 op profit 25.2 bln yn vs consensus f'cast loss 106 bln * Annual forecast raised, Japan and China sales improve * Investors looking for recovery in U.S. market * Shares end up 1.1 percent before results (Updates with more details, comments)
By Chang-Ran Kim, Asia autos correspondent
TOKYO, July 29 (Reuters) - Honda Motor Co, Japan's No.2 automaker, lifted its annual forecasts after posting a surprise first-quarter profit, but the boost came from cost reductions and executives remained downbeat on global vehicle demand.
Like most Japanese automakers, Honda is expected to see its earnings gradually improve as production volumes return from the low levels since late last year when sales plunged after the collapse of U.S. bank Lehman Brothers squeezed the auto loans market and led to job losses.
Still, most auto executives have yet to call a convincing recovery in demand and are trying to battle a sales decline with cost-cutting as much of the demand in developed markets is being supported by government schemes to encourage consumption.
"Conditions remain extremely severe in the auto market," Honda Executive Vice President Koichi Kondo told a news conference, adding that sales were weaker than expected in its key U.S. market.
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Honda, also the world's top motorcycle maker, posted an 88 percent fall in operating profit to 25.2 billion yen ($267 million) in the April-June quarter, beating a consensus estimate for a 106 billion yen loss in a survey of four analysts polled by Thomson Reuters.
It made a net 7.6 billion yen in profit in the first quarter compared with a profit of 173.4 billion yen a year ago.
"The market expected a loss so this is really a surprise, especially given that Honda seems to be having a tough situation in the United States and a lot of inventory," said Hiroaki Osakabe, fund manager, Chibagin Asset Management.
"Of course, we need to wait and hear more details about the earnings, including about production from here on in. But in terms of the overall nuance, it does seem as if the outlook has improved a bit," said Osakabe.
For the financial year to March 31, 2010, Honda expects an operating profit of 70 billion yen and net profit of 55 billion yen. Three months ago, it had forecast the profits at 10 billion yen and 40 billion yen.
The revision came despite Honda's assumption for a stronger yen against the dollar, at an average 91 yen for the financial year instead of 95 yen. It expects a stronger euro of 127 yen versus the previous 125 yen assumption.
Kondo said Honda now expects better car sales in Japan and China, but worse in the United States and Europe. Overall, it lifted its global sales forecast by about 80,000 cars to 3.295 million for the year to March 2010.
While Honda has fared better than many rivals in Japan and China this year, as government incentives helped sales of its smaller, fuel-efficient vehicles, investors are keen to see signs of a recovery in the United States and Europe, where its sales lag the market with sharp double-digit falls.
Its new Insight hybrid car has sold well at home, but it faces competition in the United States where Toyota Motor Corp's new Prius has been stealing the show with a roomier, bigger and more fuel-efficient alternative at a deep discount to the previous version.
Honda has deliberately held back shipment of the Insight to the United States to meet robust orders in Japan where the model is more profitable at current exchange rates, making it difficult to gauge latent demand in North America.
Shares in Honda have risen 44 percent in the year to date, in line with Tokyo's transport sub-index.
Before the results were announced, Honda ended up 1.1 percent while the transport sector gained 0.3 percent. ($1=94.38 Yen) (Additional reporting by Elaine Lies; Editing by Lincoln Feast and Edwina Gibbs) ((ran.kim@thomsonreuters.com; +81 3 6441 1804; Reuters Messaging: ran.kim.reuters.com@reuters.net))
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