UPDATE 4-ArcelorMittal sees muted upturn after Q3 profit

* Returns to net profit after 3 consecutive quarterly losses

* Sees Q4 EBITDA $2.0-$2.4 billion, low end of expectations

* Sees gradual improvement in challenging environment

* Shares hit three-month low, then trim losses

(Updates after company conference call)

By Philip Blenkinsop

BRUSSELS, Oct 28 (Reuters) - ArcelorMittal (ISPA.AS), the world's largest steelmaker, dampened recovery expectations on Wednesday with a muted forecast for the final three months of 2009 after a return to profit in the third quarter.

Its shares fell as much as 6.4 percent to a three-month low of 22.94 euros shortly after the opening before trimming losses to trade down 2.9 percent at 23.79 at 1040 GMT. The DJ Stoxx European basic resources index .SXPP was off 4.3 percent.

ArcelorMittal, with output some three times greater than nearest rival Nippon Steel (5401.T) and holding nearly 8 percent of the global market, said it expected its much-watched core profit (EBITDA) to be between $2.0 and $2.4 billion in the fourth quarter.

The mid-point would be a near-40 percent improvement on the third quarter, but some 20 percent down on already depressed year-earlier levels and below the average analyst expectation of around $2.5 billion.

"I think the market may take the fourth quarter outlook as indicating potential downside risk for 2010 estimates," said Andrew Snowdowne, analyst at UBS in London, who has a 'Neutral' rating on the stock, now viewed as fairly valued after doubling from mid-March lows.

The steel industry is often seen as a broad gauge of economic strength, and shares in U.S. rivals U.S. Steel Corp (X.N) and AK Steel (AKS.N) fell on Tuesday after they reported stronger than expected third-quarter results but reiterated gloomy short-term views. [ID:nN27243732]

ArcelorMittal Chief Executive Lakshmi Mittal said on Wednesday the company had seen the first signs of recovery in July-September, with production set to rise to about 70 percent of capacity in the fourth quarter from 61 percent in the third amid higher average selling prices.

"We should continue to see further gradual improvement through 2010, although the operating environment remains challenging."

Real steel demand should rise by around 10 percent next year, he said, reiterating a previous forecast.

The company turned a net profit of $903 million in the third quarter thanks to a tax credit of $899 million, after three straight loss-making quarters in which it suffered a near collapse in the construction, machinery and car markets.

Chief Financial Officer Aditya Mittal said the company was unlikely to break even over the full year.

Quarterly sales were slightly above expectations, EBITDA (earnings before interest, tax, depreciation and amortisation) slightly below. [ID:nWEA7095]

SPLIT MARKET

A reduction in inventories among key customers, which amplified the downturn for the steel sector, has finally come to an end, although the market is clearly split between a sluggish developed world and roaring emerging regions. [ID:nN27265215]

ArcelorMittal has said it does not expect markets to normalise in Europe and the United States in 2010. Demand in China, almost half of the global market, is seen growing by about 15 percent and India by 10 percent this year, the CEO said.

"We are many years away from pre-crisis demand levels, especially in the developed world," he said.

The World Steel Association forecast this month that global steel consumption would rebound by 9.2 percent in 2010 after a drop this year of 8.6 percent, a narrower decline than expected due to Chinese growth. [ID:nPEK171738]

Japan's Nippon Steel reports first-half results on Thursday. South Korea's POSCO (005490.KS), the global number four, this month signalled a brighter outlook for the sector on improved global demand. [ID:nSEO240394]

ArcelorMittal also said on Wednesday that its net debt had fallen to $21.6 billion at the end of September, down by $10.9 billion in 12 months.

It had reduced as well costs by $2.2 billion over the past year, surpassing its $2 billion target for 2009.

The company faced scrutiny over debt driven up by acquisitions, notably the then Mittal Steel's 26 billion euro takeover of Arcelor in 2006.

CFO Aditya Mittal said that deleveraging was no longer the number one priority.

The company's lenders agreed to relax covenants on $31 billion of credit lines in July and the average maturity of its debt has pushed out to 4.3 years from 2.6 years when the financial crisis struck. [ID:nLH34843]

(Editing by Dale Hudson, Greg Mahlich, John Stonestreet)