UPDATE 1-Continental sees Q2 improvement after very poor Q1

* Q1 adj EBIT loss 46.6 mln eur vs Reuters poll -1 mln eur * Net debt at end-March 11.04 bln eur vs 10.5 bln end-Dec

* Q1 free cash flow burn of 567 mln eur

* Has access to 2.89 bln eur in liquidity reserves

* Shares indicated down 1.1 pct

(Adds details from statement, background)

FRANKFURT, April 29 (Reuters) - German auto parts group Continental (CONG.DE) reported underlying operating profit collapsed during the first quarter amid plunging revenue, but it said on Wednesday it expected a noticeable improvement ahead.

Adjusted earnings before interest and tax (EBIT) swung to a 46.6 million euro ($60.65 million) loss, missing expectations of a break even in a Reuters poll of analysts and down from a profit a 582 million in the year-earlier quarter.

It continued to forecast "substantial" free cash flow for the full year and promised a "clear revival" in revenue and operating results in the second quarter compared to the very weak first three months of 2009 although one-off charges would still lead to considerable deviations from previous figures.

Revenue fell 35 percent to 4.30 billion euros while it had a net loss attributable to shareholders of 267.3 million.

Continental's net debt ballooned by over half a billion during the first three months to 11.0 billion euros, while it burned another 567 million euros in free cash.

Nonetheless, it said it still had access to cash and cash equivalents of 1.21 billion euros and unused credit lines of another 1.69 billion euros as of the end of March.

Chief Executive Karl-Thomas Neumann has pledged to present within 100 days a strategy that could resolve issues over the future of the tyre operations bundled within its Rubber Group as well as a possible integration of Continental's automotive operations with those of controlling shareholder Schaeffler.

Standard & Poor's predicted in January that Continental could pay back a 3.5 billion euro tranche of bank debt maturing in August 2010 only by disposing of its Rubber Group, an option that management is considering.

BOSCH SEES FIRST LOSS SINCE 1945

Continental said last week it had held to the covenants governing an 11.8 billion euro credit line during the first quarter, but added this would remain a "major challenge" for the rest of the year although the limit for its net debt as a ratio to EBITDA was adjusted higher only three months ago.

Earnings before interest, taxes, depreciation and amortisation was 250 million euros in the first quarter.

The company began to bleed senior management just as automotive markets went into a tailspin, losing such respected cost-killers as Chief Executive Manfred Wennemer and finance head Alan Hippe along with Chairman Hubertus von Gruenberg to bitter power struggles with Schaeffler CEO Juergen Geissinger.

The negotiations between Schaeffler and its creditor banks to keep the privately owned bearings maker afloat are expected to result in a debt-for-equity swap that leaves Maria-Elisabeth Schaeffler and her son with only a minority in the company.

Speculation has emerged over whether Schaeffler's spectacular leveraged acquisition of a controlling stake in Continental, a company three times its size, could end up in a reverse takeover and the sacking of Geissinger.

According to Thomson Reuters StarMine, which weights analysts' forecasts according to their track record, Continental is valued roughly in line with other European car parts makers.

Based on its EV/EBITDA, the stock trades at a multiple of 5.5 -- identical to Michelin's (MICP.PA), lower than the 5.7 for Faurecia (EPED.PA) and higher than the 4.3 for Valeo (VLOF.PA).

Continental and Schaeffler are not the only ones suffering. German industrial giant Bosch [ROBG.UL] last week forecast a collapse in demand at its industry-leading auto parts business would lead to its first annual loss since 1945.

(Reporting by Christiaan Hetzner)