WRAPUP 2-South Korean economy, rate outlook get a boost

* S.Korea Q2 economic growth stronger than first thought

* Q2 GDP could be revised up to 7-year high

* Fitch ups rating outlook to stable, shares trim losses

* Banks and investors price in c.bank policy tightening (Updates with fresh analysts' comments, details, markets)

By Yoo Choonsik and Seo Eun-kyung

SEOUL, Sept 2 (Reuters) - South Korea's finance minister said the economy may have grown its fastest pace in seven years in the second quarter and Fitch raised the country's credit outlook, reinforcing chances for an interest rate increase this year.

The faster-than-expected recovery of Asia's fourth-largest economy from the global downturn has prompted bullish outlooks from global brokerages, with Daiwa Securities projecting 0.1 percent growth for this year and Credit Suisse rating the KOSPI .KS11 stock exchange as the "biggest overweight market."

"The rating outlook hike and recent strong economic data will push the central bank a step closer to rate hikes, if not immediately," said Park Jong-youn, a fixed-income analyst at Woori Investment & Securities.

Finance Minister Yoon Jeung-hyun said on Wednesday that second-quarter growth will probably be revised up to between 2.6 percent and 2.7 percent from 2.3 percent estimated earlier.

A 2.7 percent rise would be the biggest in seven 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.

Investors, however, have already priced in early rate hikes amid signs of possible asset bubbles and a pick-up in domestic demand.

One-year Korean interbank lending rates KIKRW1YD= have returned to levels last seen in late January when the central bank was about to wind up its unprecedented easing cycle, while the 91-day certificate of deposit KRCD=KQ rates climbed 16 basis points in a month to hit a 6-month high.

The central bank next reviews rates on Sept 10.

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. In particular, it said the country's foreign currency credit crunch following the global financial crisis had eased significantly. [ID:nWNA2582]

The announcement gave an immediate boost to Seoul shares .KS11, which recouped much of their earlier 2 percent decline, and also helped buoy the won KRW=.

"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 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.

Policymakers have been at pains to dampen expectations that a recovery has arrived, though signs are mounting that the economy could be rebounding faster than many had anticipated, fueling speculation on when the central bank will start 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 riskier assets such as shares. [KR/]

RESERVES RISE

Central bank data showed the nation's foreign currency reserves surged to a 13-month high of $245.46 billion 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.

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 recovery in 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)