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* Q4 EPS $1.03 vs est $0.61
* Interest expense halves
* Funded loan volume up 6 percent year-ago
* Shares rise 7 percent
By Jochelle Mendonca
Jan 29 (Reuters) - CIT Group Inc's fourth-quarter profit beat Wall Street estimates as the small business lender halved spending on the servicing of long-term debt and said it might return capital to shareholders this year, sending its shares up 7 percent.
CIT Group, led by former Merrill Lynch Chief Executive John Thain, has been operating under an agreement with the U.S. Federal Reserve that has prevented it from buying back stock or paying a dividend without approval.
Investors had been concerned that the agreement would effectively preclude CIT from returning capital to shareholders. But Thain said that this was not necessarily the case.
Speaking on a post-earnings conference call, he said the company had asked for approval to return a "modest" amount of capital and that the Federal Reserve could approve the request without lifting the operating order.
Investors cheered Thain's comments, sending the stock to its highest in 18 months. It was up $2.83 at $43.45 in late morning trading on the New York Stock Exchange.
"The characterization of the 2013 capital return is less important than the initiation of the return, which will attract new income investors," BTIG analyst Mark Palmer said.
The New York-based company also posted its first profit in four quarters as its program to cut high-cost debt started to pay off.
CIT has wiped out more than $30 billion in expensive debt since it emerged from bankruptcy three years ago, dramatically lowering the amount it pays in interest.
The company's interest payments on its long-term debt halved to $324.1 million in the fourth quarter.
For the quarter ended Dec. 31, CIT earned $206.8 million, or $1.03 per share, far higher than the $36.3 million, or 18 cents a share, it earned a year ago.
Analysts on average had expected the lender to earn 61 cents a share, excluding items, according to Thomson Reuters I/B/E/S.
CIT also grew its loan book during the quarter. Funded loan volume rose 6 percent to $3.1 billion, a faster pace than that of most regional banks, despite increasing competition.