UPDATE 3-Toshiba eyes cautious recovery, Q2 chip profit

* Apr-June operating loss widens 64 pct to Y37.6 bln

* Toshiba exec: another dip still possible this year

* Shares up 0.5 pct vs 1.3 pct rise in electronic subindex

* Advantest sees bigger loss, but orders double vs prev qtr

* NEC Elec falls to loss; capacity utilisation to rise

(Adds Advantest, NEC Electronics results)

By Mayumi Negishi

TOKYO, July 29 (Reuters) - Toshiba Corp (6502.T), Japan's biggest chipmaker, expects its chip business to turn profitable this quarter on aggressive cost cuts, but warned of a possible year-end dip in demand, underlining the fragile recovery in the sector.

Slammed by relentless double-digit falls in memory chip prices, chipmakers have reined in output of NAND chips, used in digital music players, memory cards and Apple Inc's (AAPL.O) iPhone, slowing the pace of price falls.

But in line with past boom-to-bust cycles in the memory sector, supply is set to rise, and a rogue step could dislodge a tentative recovery.

Toshiba, the world's No. 2 maker of NAND flash memory chips, is nudging up output after cutting production by 30 percent in January through June. Analysts expect Samsung Electronics (005930.KS), the world's biggest memory chip maker, to also boost production this year.

"Both Samsung and Toshiba will boost output, but I think they will be able to compete like adults (and not flood the market)," Shigeo Sugawara, senior investment manager at Sompo Japan Asset Management said on Wednesday.

"Toshiba's annual target is still ambitious, but it is more attainable now," he said.

Toshiba stuck to its forecast for a return to a 100 billion yen ($1.1 billion) operating profit for the year to next March, after reporting a smaller-than-expected quarterly operating loss as price falls in chips slowed.

The forecast far exceeds the 29.7 billion yen average profit forecast of 18 analysts polled by Reuters.

Toshiba is speeding up investments in new technologies to keep up with Samsung, whose chip operations returned to a profit on a nascent chip recovery [ID:nSEO372304].

Having shouldered three straight quarters of losses, Toshiba, the owner of U.S. nuclear power firm Westinghouse, raised $5 billion in May to shore up its finances, helping boost its stock.

Its shares rose 38 percent in April-June, outpacing a 25 percent rise in Tokyo's electrical machinery subindex .IELEC.T.

Contract prices in NAND have stabilised as chipmakers rein in output, but thinktank inSpectrum notes growing output and competitive pricing is starting to push down prices again.

UNCLEAR OUTLOOK

Toshiba's mainstay chip operations will likely turn profitable in July-September, Toshiba Corporate Executive Vice President Fumio Muraoka told a news conference.

"But the outlook from October and beyond is still unclear. A second and even third dip are still possible," he said.

Toshiba's operating loss widened to 37.6 billion yen in April-June from 22.9 billion yen a year ago, although the loss was narrower than the 52.6 billion yen consensus loss forecast by 3 analysts.

The company's earnings were hit by a sharp fall into the red in its panel displays business, a cheaper euro and weak PC prices, which countered the impact of cost cuts that boosted Toshiba's solutions and infrastructure network businesses.

Toshiba posted a net loss of 57.8 billion yen, against an 11.6 billion yen loss a year earlier on a 17 percent fall in sales.

SECTORWIDE HOPE

A lull in demand for large flat TVs and other high-end electronics also hurt sales at Toshiba's smaller rival NEC Electronics Corp (6723.T), which tumbled to a 20.9 billion yen quarterly operating loss, despite cost cuts of 25 billion yen.

But it expects its capacity utilisation to rise to about 65 percent in July-September, up from 51 percent in April-June.

Advantest Corp (6857.T), the world's No.2 maker of chip testers, forecast an operating loss of 8.2 billion yen in the six months through September, more than double last year's loss, as chip makers' spending on new machines dwindle.

But in another sign the sector may be bottoming out, Advantest's orders doubled in April-June from the previous quarter to 11.6 billion yen, although still down 36 percent from the previous year.

Ahead of the results, Toshiba shares rose 0.5 percent, Advantest was up 3.3 percent and NEC Electronics added 5.9 percent, versus a 1.3 percent gain in the subindex .IELEC.T. (Editing by Anshuman Daga)