T0PWRAP 5-Bernanke hopeful if guarded on US; UK deeper in debt

* Bernanke cautiously upbeat but says rates to stay low

* UK public finances register worst June on record

* Bellwether Caterpillar sees recovery; CIT teeters

* U.S. blue-chip stocks up for seventh day (For more on the financial crisis, click on [nCRISIS])

By Ros Krasny

CHICAGO, July 21 (Reuters) - Federal Reserve Chairman Ben Bernanke sounded a cautiously upbeat note on the U.S. economy on Tuesday, while underscoring risks from persistently weak labor markets, even as bellwether industrial company Caterpillar Inc said conditions were turning up.

In Europe, though, automotive companies reported steep losses and offered grim forecasts, suggesting recovery there is still some ways off. And the UK's crumbling tax base caused its highest budget deficit ever for the month of June.

Bernanke expressed guarded optimism in testimony to the House of Representatives Financial Services Committee, consistent with the Fed's recent assessments that an economic recovery should begin over the next few months.

Still, the chairman warned that persistently high unemployment could still sap consumer confidence enough to undercut the nascent recovery. [nN21221058]

"The tenor (of Bernanke's comments) is consistent with ongoing risks to the recovery that will be gradual in 2010, and encourage a stance of keeping rates low for an extended period," said Alan Ruskin, chief international strategist at RBS Securities in Greenwich, Connecticut.

Bernanke also said the Fed can avoid a spike in inflation some fear will be created by the vast sums of money it has pumped into financial markets, by pulling the liquidity plug in "a smooth and timely manner" when the time is right.

For now, though, "the FOMC believes that a highly accommodative stance of monetary policy will be appropriate for an extended period," he said. The Fed has held benchmark interest rates near zero since December.

A collapse in home prices helped tip the United States into its deep recession, but problems now are becoming concentrated in commercial real estate. The ratings agency Moody's issued a warning that the sector's decline is accelerating. [ID:nWNA9451].

"We'll see some problems there, I'm sure," Bernanke said of commercial real estate during his testimony. "The fundamentals are weakening and the financing situation is very tough."

BOUNCING CAT

Earlier, top U.S. machinery maker Caterpillar (CAT.N) posted stronger-than-expected quarterly earnings and raised its full-year outlook, citing greater stability in the world's credit markets and economies. Customers overseas account for more than 60 percent of its sales.

Caterpillar's chief executive Jim Owens said conditions "set the foundation for an eventual recovery."

Major U.S. equities indices hit new highs for 2009 on Tuesday, helped by Caterpillar's outlook and sustained optimism about the overall sweep of the corporate earnings season.

The blue-chip Dow Jones industrial average .DJI rose for a seventh straight day, finishing up 68 points or 0.77 percent at 8916. The broader S&P 500 index .SPX ended up 0.36 percent, or 3.41 points, at 954.54 after touching its highest point since November.

After the closing bell, closely-watched technology company Apple (AAPL.O) reported better-than-expected earnings, which could extend the stock market's rally on Wednesday.

Other U.S. companies could not embrace Caterpillar's upbeat assessment.

United Technologies (UTX.N), which makes products from air conditioners to jet engines, lowered its 2009 forecasts and said it will stay focused on cost-cutting as a way to stabilize earnings as weak demand grinds on.

Commercial lender CIT Group (CIT.N), teetering on the edge of bankruptcy, forecast a second-quarter loss of more than $1.5 billion. The 101-year-old firm lends to nearly 1 million small and mid-sized businesses, and its demise could choke off operating funds to some of those companies.

European auto companies, meanwhile, posted steep losses and issued downbeat outlooks, even as global car markets in general are increasingly priced for an economic rebound.

Second-quarter results from Volvo (VOLVb.ST), the world's second-biggest truckmaker, and French car parts manufacturer Faurecia (EPED.PA) painted a bleak picture. [ID:nLL21535]

Volvo maintained its forecast that the economic downturn would see its main, recession-hit U.S. and European markets shrivel this year.

But in contrast to others in the sector, Volvo succeeded in cutting inventories as it adjusted to dwindling demand by significantly slowing spending.

"I think that market expectations were for a much more negative cash flow," Handelsbanken analyst Hampus Engellau said of the Volvo results.

BRITAIN DEBT-RIDDEN; ITALY BRIGHTER

While the Fed has said it has plenty of ways to push borrowing costs up when the time comes, the need for a clearly defined exit strategy came into sharp focus in Britain.

Crumbling tax revenues propelled Britain's budget deficit to a record high for the month in June, putting the government under further pressure to spell out a credible debt-reduction strategy. [ID:nLL444821]

Data showed the public sector posted a net cash requirement of just under 19 billion pounds ($31 billion) last month, slightly lower than analysts had forecast but the worst reading since records began in 1984. Public sector net borrowing came in at just over 13 billion pounds.

The deterioration took public sector net debt to 56.6 percent of GDP, the highest since records began in 1974.

A brighter outlook was flagged for Italy, where Bank of Italy governor Mario Draghi said the worst of the country's economic crisis is over. "We are starting to see some positive signs," Draghi told a Senate commission.

Minutes from the Reserve Bank of Australia's July meeting showed the bank more optimistic on growth, in part because of Australia's strong exports to China. [ID:nSYD462979]

(Additional reporting by Reuters reporters worldwide, editing by Philip Barbara)