* Government raises assessment, cautious on outlook
* Says exports, industrial production nearing bottom
* Cuts view on employment, says worsening rapidly, severe
TOKYO, May 25 (Reuters) - The government raised its assessment of Japan's economy for the first time in three years on Monday, saying the pace of worsening is slowing as exports and industrial output are nearing bottom.
The revision followed an upbeat view last week from the Bank of Japan, which also raised its assessment of the economy, saying a rebound in global demand could mean last quarter's record 4.0 percent contraction was the worst of the recession.
But the government echoed a cautious tone on the outlook sounded by the central bank's governor while cutting its assessment of jobs conditions in a monthly report. It said the employment situation was severe and worsening rapidly.
"While the economy is in a difficult situation, the tempo of worsening has become moderate," the government said in the report, upgrading its overall assessment for the first time since February 2006.
Previously, the government had said the economy was worsening rapidly and in a severe state.
"As for short-term prospects, with a worsening employment situation, the economy is likely to remain severe for the time being," the report said.
In 2002, when Japan emerged from its last recession, caused by the bursting of the dot.com stock bubble, the government raised its assessment of the economy and said it showed some signs of bottoming out.
This time it is taking a more subdued line.
"The economy has not bottomed out," said Fumihira Nishizaki, director of macroeconomic analysis at the Cabinet Office.
"The worst period of the recession may be over in the sense that the economy has stopped worsening sharply, but we need to see if that will lead to a sustainable recovery."
The government said the current extremely low level of production activity may further aggravate employment, and the financial crisis and global slowdown could weigh on the economy.
Recent rebounds in exports and industrial output led the government to upgrade its assessment of these key drivers of the world's second-largest economy.
The government also raised its view on bankruptcies and public investment as the rise in bankruptcies has moderated and its stimulus spending has boosted contracts for public works.
On Friday, the Bank of Japan upgraded its assessment of Japan's economy for the first time in nearly three years. But Governor Masaaki Shirakawa said on Monday the economy still faced significant risk and uncertainty despite some bright signs, reiterating that private consumption and capital spending will likely remain weak. (Reporting by Tetsushi Kajimoto; Editing by Michael Watson)