UPDATE 2-Yum will raise prices to cover higher costs

* Sees mid-teen percentage rise in China wage inflation

* Sees food and paper inflation up 5 pct in China in 2011

* Recently raised menu prices in China

* Foreign exchange, new restaurants to boost 2011 results (Adds company and investor comment, details on results, byline; updates share activity)

By Lisa Baertlein

LOS ANGELES, Feb 3 (Reuters) - Yum Brands Inc (YUM.N) forecast rising 2011 labor and food costs in China and said that modestly raising prices in its top growth market would help mitigate that pressure.

Shares in the owner of the KFC, Pizza Hut and Taco Bell fast-food chains, rose $2.10, or 4.4 percent, to $49.83 in midday trading after the company left the door open to menu price hikes in other parts of the world.

Louisville, Kentucky-based Yum, the No. 1 Western restaurant brand in the world's fastest-growing major economy, expects China wage inflation in the mid-teen percentages this year.

It also sees food and paper inflation of 5 percent in China, 4 percent in the United States and 3 percent in other parts of the world where it operates.

If trends intensify in the coming months, commodity pressures could be greater than that, Chief Financial Officer Richard Carucci told analysts on a call on Thursday.

Higher costs for ingredients like beef, cooking oil and cheese are squeezing restaurant operators. Food cost spikes have been problematic in China, which contributes more than one-third of Yum's profit.

Yum has more than 3,700 restaurants -- mostly KFC outlets -- in China and has a big lead over Western rivals in that market, where it one day hopes to have 20,000 restaurants.

Yum's same-restaurant sales in China were up 8 percent for the fourth quarter, fueled by increased visits, and topped the 5.2 percent gain reported by McDonald's Corp (MCD.N) , which operates almost 1,300 restaurants in China.

But payroll and benefits expenses rose 33.5 percent in China from the quarter a year earlier, while paper and food expenses rose 19.5 percent.

Yum executives said the company recently passed through "modest" menu price increases in China and that those higher prices should cover most of its inflation expectations for the year.

If food cost increases exceed expectations, executives said the company would consider passing them to diners -- echoing comments from McDonald's, which also has raised prices in China and signaled that it would raise prices elsewhere to cover higher food costs.

Yum expects 2011 earnings growth of "at least 10 percent" -- which analysts said translated to $2.78 per share. It said strong overseas business, a positive impact from foreign exchange and 1,400 new restaurants in fast-growing markets outside the United States would buoy sales and profits.

Yum on Wednesday reported better-than-expected fourth-quarter results, boosted by surprisingly strong sales in China and the United States and a lower tax rate.

Chicken, the key ingredient at KFC, has not participated in the commodity run-up. That helped protect margins in China.

Channing Smith, managing director of Capital Advisors, said wage inflation ultimately ends up putting more money in the pockets of Chinese consumers, who then can spend it on low-priced items like food. Smith's firm has more than 100,000 Yum shares under management. (Reporting by Lisa Baertlein. Editing by Robert MacMillan)