WRAPUP 2-Europe banks say on the mend despite pain ahead

* RBS warns of more writedowns, rising bad debts * Swiss Re posts surprise loss on writedown, shares dip * UBS says govt bailout helps stem client outflows * RBS shares down 6 pct; Swiss Re down 4 pct * Other bank shares up as capital rebuild continues

(Adds RBS quote, reference to Italian banks plan)

By Steve Slater and Jason Rhodes

LONDON/ZURICH, Nov 4 (Reuters) - European banks and insurers warned of tough times ahead as more writedowns and rising bad debts hit profits but executives said confidence in the industry was recovering and most bank shares rose.

UBS (UBSN.VX), Royal Bank of Scotland (RBS.L) and reinsurer Swiss Re RUKN.VX all said on Tuesday they face more writedowns on toxic assets or because of accounting rules in the current quarter, and showed the financial crisis is causing more pain for consumers and businesses.

South Africa's Nedbank (NEDJ.J) also forecast no growth in headline earnings for the full-year after a rise in bad debts in the third quarter.

Shares in RBS and Swiss Re fell. However, the broader banks sector shrugged off the worries as investors latched on to hopes that banks are rebuilding capital to weather the storm, with government help.

Swedbank (SWEDa.ST) said it will be the first bank to participate in a Swedish government-sponsored scheme, and Italy is expected to this week give details of how it might help recapitalise the country's banks.

By 1250 GMT the DJ Stoxx European bank sector .SX7P was up 3.2 percent. Italy's Unicredit (CRDI.MI) led gainers with a 10 percent rally.

"The government action around the world has given the financial system a very good chance of getting through to the point of market stability and the early signs are favourable," said Stephen Hester, incoming chief executive of RBS.

"But we've still got some rocky months to go in the world economy and I'm sure there will be uncertainties that hit banks of all sorts," he told reporters on a conference call.

UBS Chief Financial Officer John Cryan told Reuters that the pace of withdrawals had slowed in the fourth quarter after an 83.6 billion Swiss Franc outflow in the third quarter. [nL487491]

"FUTURE LOOKS STORMY"

Edinburgh-based RBS, which is raising 20 billion pounds ($32 billion) from the government and investors, warned it will be hit by more writedowns, rising bad debts and possibly a goodwill charge on last year's ill-timed purchase of ABN AMRO assets.

It was not possible to forecast second-half results, the bank said, but the grim outlook unsettled investors and its shares fell 5 percent. [nL4398710]

RBS wrote down 206 million pounds in the third quarter, but that would have been 1.4 billion without help from accounting changes on how securities are classified.

Exposure to counterparty and sovereign risk, which could include losses on exposure to Iceland or Lehman Brothers and other banks, was 700 million pounds in September and hit income by 1 billion pounds in October.

Swiss Re, the world's second-biggest reinsurer, reported a surprise third-quarter net loss of 304 million Swiss francs ($263.2 million), hurt by investment losses.

The reinsurer wrote down another 572 million Swiss francs on investments for the third quarter and reported a 289 million franc mark-to-market loss on credit default swaps. [nL387358]

"The present is cloudy and the future looks stormy," said Fabrizio Croce, analyst at Kepler Capital Markets, in regard to Swiss Re, which has already been hurt more than rivals by the credit crisis.

Switzerland's UBS, which has taken more toxic asset writedowns than any other European bank, warned it could take a 6 billion Swiss franc ($5.2 billion) hit in the fourth quarter due to accounting effects.

The world's largest wealth manager took a 6 billion franc capital injection last month.

UBS said it expects market conditions to remain "challenging" and shrinking client assets to affect fees.

UBS and RBS are among the dozens of banks worldwide to change top management and reshape their businesses following the credit crisis.

UBS said it is sticking to its goal of returning to profit in 2009 while continuing to reduce its huge balance sheet.

RBS plans to shrink its assets, reduce risks and resume paying dividends in 2010. It also plans to cut costs and said this was likely to result in further job losses. (Additional reporting by European bureaux; Editing by Andrew Callus)