UPDATE 3-Textron surprises Wall Street with profit

* Q3 cont. ops profit $0.02/shr; Street view loss $0.03

* Revenue down 26.6 pct

* CEO-elect sees "modest" recovery

* Shares up 2 percent (Adds analyst quote, stock action, background, byline)

By Scott Malone

BOSTON, Oct 27 (Reuters) - Diversified U.S. manufacturer Textron Inc (TXT.N) surprised Wall Street with a quarterly profit as heavy cost-cutting helped offset weak demand for business jets and the wind-down of much of its financial arm.

Textron shares rose 2 percent to $18.80 in premarket trading Tuesday, a far cry from their March lows below $4 when investors feared for the future of the world's largest maker of corporate aircraft.

"We continue to believe all of Textron's cyclical businesses ... are turning the corner, and that its defense business is well positioned," Goldman Sachs analyst Noah Poponak wrote in a note to clients.

Textron has scrambled to cope with the economic downturn, cutting staff by 23 percent and taking steps to protect liquidity, including drawing down its entire line of credit

With the U.S. economy showing signs of stabilizing after the worst slump since the Great Depression, Textron said it will keep a careful eye on costs. It said it expects full-year profit to come in toward the high end of its prior forecast of 33 cents to 63 cents per share, factoring out special items.

"The demand environment for our commercial products continues to show signs of stabilization, but we believe that market recovery likely will be slow and modest," said Chief Executive-elect Scott Donnelly, who is due to succeed Lewis Campbell on Dec. 1.

BEATS ANALYSTS' ESTIMATES

The Providence, Rhode Island-based company, which also makes Bell helicopters and EZ-Go golf carts, posted third-quarter earnings of $4 million, or a penny per share, down sharply from $206 million, or 83 cents per share, a year earlier.

Earnings from continuing operations came to 2 cents per share. Analysts' average forecast was a loss of 3 cents per share, according to Thomson Reuters I/B/E/S.

Revenue fell 26.6 percent to $2.55 billion, slightly above the $2.52 billion Wall Street anticipated.

The company lost $58 million, or 22 cents per share, in the second quarter.

Textron has scaled back its finance arm this year -- pulling out of businesses like making loans to golf resort developers -- to focus on its original mission of providing financing for purchases of equipment made by its manufacturing arms. The finance unit was hit hard by the credit crunch.

Donnelly joined Textron from General Electric Co (GE.N) in June 2008. Investors believe he has been instrumental in leading the company's restructuring through the credit crunch.

Textron has made a number of dramatic moves to protect liquidity this year, including raising more than $800 million in stock and debt, slashing its dividend 91 percent, and drawing down its line of credit to pay off its commercial paper.

Textron shares were up 2 percent in premarket trade. As of Monday's stock market close, the shares were up 38 percent this year, outpacing a 14 percent rise in the Standard & Poor's capital goods industry index .GSPIC. (Reporting by Scott Malone; Editing by Maureen Bavdek and John Wallace)