UPDATE 2-Carillion sees tough market, increased earnings

* Carillion sees a rise in 2010 earnings

* Spending cuts could spell opportunity for support services

* Carillion shares down 1.98 pct

(Adds detail, comments, background)

By Golnar Motevalli

LONDON, July 7 (Reuters) - British building and support services group Carillion (CLLN.L) said it expected an increase in earnings in 2010, due to a strong order book and more government outsourcing, despite challenging market conditions.

Carillion, which generates much of its revenue from government work and public private partnership (PPP) projects, said investments in PPP continued to generate "substantial value" and it expected to maintain a positive net cash position for the first six months of 2010.

It has an order book of 19.7 billion pounds ($29.93 billion).

"All business sectors are performing in line with our expectations. The order book remains very strong ... I think very much the hot news on the emergency budget was pretty much in line with our expectations," Chief Executive John McDonough told Reuters.

Last month Britain's coalition government announced major cuts in public spending, the details of which are expected to be revealed in a spending review in the autumn.

Carillion said it did not expect the cuts to have a big impact on the company and would likely boost future revenue as the government would lean more heavily on private sector outsourcing to help it drive down costs.

"By the back end of 2011 to 2015 there will be significant opportunities," McDonough said.

Last month the company sold its investments in the Queen Alexandra Hospital PPP project to HSBC Infrastructure Company Limited for 31.3 million pounds.

McDonough said about 500 million pounds worth of Carillion's contracts in the pipeline were at the preferred bidder stage and therefore still subject to change, delay or cancellation.

On Tuesday, a smaller rival, Mouchel (MCHL.L) said one of its proposals to lead an outsourcing contract for Bournemouth Council would be delayed after the council decided to defer a decision despite the company having preferred bidder status.

McDonough said organic growth would be Carillion's focus but that it would consider making bolt-on acquisitions in Britain, if the right opportunity came along.

"We've got cash on the balance sheet, we've got great growth in the Middle East and in Canada," McDonough said.

Panmure Gordon increased its target price on the Carillion shares to 350 pence from 300 pence.

"It retains good revenue visibility, a sound balance sheet and has an attractive valuation," Panmure analyst Andy Brown said in a note.

Carillion shares were down 1.98 percent at 307.7 pence per share by 1030 GMT, underperforming against the support services index .FTNMX2790 which was down 1 percent. (Editing by Sharon Lindores) ($1=.6581 Pound)