* Economic growth stronger than expected in Q2
* S.Korea Q2 GDP seen revised up to 2.6-2.7 pct from 2.3 pct
* Fitch ups South Korea rating outlook to stable
* Fitch says credit crunch has eased significantly
* S.Korean reserves recover to pre-crisis level
By Yoo Choonsik and Seo Eun-kyung
SEOUL, Sept 2 (Reuters) - South Korea's economy grew more strongly than expected in the second quarter, and Fitch Ratings said the credit market had improved enough for it to raise its outlook on the country's credit rating to stable from negative.
Second-quarter growth will probably be revised up to between 2.6 percent and 2.7 percent from 2.3 percent estimated earlier, Finance Minister Yoon Jeung-hyun said on Wednesday at a breakfast meeting with a group of lawmakers.
That would be the biggest rise in 5-½ years. The central bank issues the official figures on Thursday.
But Yoon said it was too soon to start thinking about raising interest rates, which have been held at a record low of 2.0 percent for the past six months as part of a range of measures by the authorities to protect the export-reliant economy from the worst of the global slump.
"I don't see the economy is yet in a full recovery. It's not time to discuss raising rates," Yoon told lawmakers.
Fitch said fundamentals of Asia's fourth-largest economy had recovered enough for a lift in the negative outlook it handed South Korea last November at the height of the global economic downturn. [ID:nWNA2582]
In particular, Fitch said the country's foreign currency credit crunch following the global financial crisis had eased significantly.
The announcement gave an immediate boost to Seoul shares
<.KS11> which recouped most of their earlier 2 percent decline
and also helped buoy the won
"South Korea's sovereign credit fundamentals have regained ground against the 'A' peer groups, warranting an outlook revision to stable," said Ai Ling Ngiam, Asia Sovereigns director at Fitch, in a press release.
Fitch has a sovereign rating on South Korea one notch higher than the other two major international ratings agencies. Standard & Poor's rates the country A and Moody's has an A2 rating.
"South Korea's economy is rebounding quite strongly, so there is a chance this action (by Fitch) could eventually influence other agencies," said Sebastien Barbe, a senior economist at Calyon.
"But I think that a major condition must be met for more upgrades to happen, namely more certainty that Korea's recovery is really sustainable," he added.
Yoon and other officials have been at pains to dampen expectations that a recovery has arrived, though signs are mounting that the economy could be back on track much faster than many had anticipated, fueling speculation on when the central bank will begin lifting rates.
Yoon's caution on Wednesday helped maintain the recent rally in bond futures which has been largely driven by a global shift in appetite away from shares.
RESERVES RISE
Central bank data showed the nation's foreign currency reserves surged again to hit a 13-month high in August, back to its pre-crisis level after sliding to a 4-year low in November. [ID:nSEO373060]
The Bank of Korea has already begun to unwind its dollar liquidity support to local banks after extending huge liquidity on the help of the U.S. Federal Reserve.
"The upgraded outlook will help our companies and institutions raise overseas funds at a lower cost and should have positive impact on the domestic financial markets," the finance ministry's director general, Kim Ik-ju, told reporters.
His comment came amid a flurry of positive signs that the nation has been quickly pulling out of a deep trough and the domestic demand has begun to pick up.
Data compiled by a local newspaper showed that the nation's top three department stores enjoyed their annual sales growth in August double from July, the latest data suggesting a recovering domestic consumption.[ID:nSEO152022]
However, the value of South Korean exports per working day fell for a second consecutive month in August and shipments dropped at a double-digit pace from a year earlier, underlining concerns that a global recovery will take time. [ID:nSEO170026] (Editing by Jonathan Thatcher & Kim Coghill)