* Fourth-quarter EPS falls 55 percent to $1.04
* Revenue dips 7 percent to $16.08 bln; misses forecast
* Inventory down from third quarter, but up from last year
* Forecasts 2013 profit in range below Street view
* Shares rise on 2013 forecast
By Ernest Scheyder
Jan 28 (Reuters) - Caterpillar Inc, the world's largest maker of construction equipment, posted a 55 percent drop in quarterly profit on Monday and set a cautious tone for the year, citing weak demand and oversupply.
Executives at the company, which last year slashed production to reduce inventory, balanced their optimism on recent improvements in U.S. housing starts with concern about China's slowing growth, the U.S. deficit and eurozone instability.
However, investors took heart in Caterpillar's 2013 profit forecast of $7 to $9 per share, lifting the stock 1.8 percent in afternoon trading.
Of the 25 analysts in the United States, Canada, Britain and South Korea who cover Caterpillar's stock, seven had cut 2013 profit estimates in the past month, with the lowest at $7.63 per share, according to Thomson Reuters I/B/E/S.
High inventory remains a short-term challenge for the Peoria, Illinois-based company. While Caterpillar cut its equipment inventory glut by $2 billion sequentially in the fourth quarter, levels remain $1 billion higher than a year ago.
Caterpillar still has an oversupply of products in China, and executives said they hope to sell some of it by June.
Quarterly results were hit by a charge of 87 cents per share after the company discovered accounting fraud at a Chinese coal mining supplier it bought last year.
In a somber note on the global economy, Caterpillar said the "most significant favorable factor" for 2013 profit will be the absence of the ERA accounting fraud writedown, not increased demand for its machines.
"We're encouraged by recent improvements in economic indicators, but remain cautious," Caterpillar Chief Executive Doug Oberhelman said on Monday.
For the fourth quarter, Caterpillar posted net income of $697 million, or $1.04 per share, compared with $1.55 billion, or $2.32 per share, in the year-ago quarter.
Excluding one-time items, the company earned $1.46 per share. Analysts had expected $1.69.
Caterpillar's operating margin fell to 6.5 percent from an all-time high of 15.8 percent in the third quarter of 2012.
Revenue fell 7 percent to $16.08 billion. Analysts had expected revenue of $16.12 billion, according to Thomson Reuters I/B/E/S.
Caterpillar closed the purchase of ERA Mining Machinery Ltd and its subsidiary Siwei, China's fourth-largest maker of hydraulic coal mine roof supports, last June for $653.4 million (HK$5.06 billion).
After the deal closed, Caterpillar found that physical inventory did not match accounting statements, a discovery that led to the charge. The case has opened questions about Caterpillar's research into ERA before the deal, as well as the adequacy of its auditors.
Caterpillar does not expect the fraud to harm its 2013 profit, but it will hinder the company's expansion into China, the world's largest coal producer.
"I recognize the decision to acquire (ERA) happened on my watch and the buck stops at my desk," Oberhelman said on a call with investors. "I am accountable for that acquisition."
Oberhelman, CEO since 2010, said Caterpillar is "considering all options to recover our losses and hold those responsible accountable for their wrongdoing."
Emory Williams, the chairman of ERA when the Caterpillar deal closed, ended days of silence on Monday, saying in a statement issued before the Caterpillar earnings statement that he was "dismayed" by the accounting charge Caterpillar was taking.
Williams said nothing about the accusation of accounting misconduct in his statement.
Citigroup Inc and law firm Freshfields Bruckhaus Deringer LLP served as financial and legal advisers to Caterpillar on the transaction. Blackstone and DLA Piper acted as ERA's financial and legal advisers.
A source directly involved with the Caterpillar deal previously told Reuters that RSM Nelson Wheeler was ERA's auditor, while Deloitte and Ernst & Young acted on Caterpillar's side.
None of the auditors has commented.