UPDATE 3-Cummins beats, raises but remains cautious on 2010

* Q3 net EPS of 48 cents

* Q3 EPS ex-items of 56 cents

* Analysts looking for EPS of 37 cents

* US, European weakness offsets emerging market rebound

* Caution on 2010 sends shares lower

(Adds analyst comment, share reaction, byline)

By James B. Kelleher

CHICAGO, Oct 30 (Reuters) - Cummins Inc (CMI.N) reported stronger-than-expected quarterly earnings on Friday, citing improving demand in China, India and Brazil and the effectiveness of cost-cutting at home.

The maker of engines and power-generation equipment also raised its full-year revenue and margin forecasts, sending its shares up as much as 6 percent in early trading.

But the shares gave up all those gains after Cummins warned during a conference call that the recession was not yet over for its business, especially in the developed world.

It said the sharp drop in demand for its engines and other power-generating products in two key markets would extend well into next year.

"While we saw improvement in some markets in the third quarter, we expect the economic climate to remain challenging until late 2010 - especially in the United States and Europe," Tim Solso, the company's chairman and chief executive, said.

Cummins reported third-quarter net profit of $95 million, or 48 cents a share, down from $229 million, or $1.17 a share, a year ago. Sales fell 31 percent to $2.53 billion.

The company booked $22 million in restructuring and other charges during the quarter to cover costs associated with ongoing job-reduction actions.

Excluding those items, earnings were 56 cents a share.

Analysts on average expected the Columbus, Indiana-based company to report a profit of 37 cents a share on sales of $2.48 billion, according to Thomson Reuters I/B/E/S.

The company continued to reduce inventory and increase its liquidity during the quarter.

At the end of the third quarter, the Company had $686 million in cash and cash equivalents on hand, compared to $534 million at the end of the second quarter and $426 million at the end of 2008.

Sales of engines and components for U.S. on-highway trucks increased slightly during the quarter ahead of new emissions standards that take effect Jan. 1. But the company warned the uptick probably was fleeting.

"Based on current orders and market intelligence, Cummins expects very low demand in these markets during the first half of 2010," it said in its release.

Cummins shares were down about 33 cents at $45.59 on the New York Stock Exchange after earlier trading as high as $48.90. (Reporting by James B. Kelleher, editing by Dave Zimmerman and Derek Caney)