UPDATE 2-ITV sees surprise ad revenue increase, shares jump

* Oct NAR down 3 pct, Nov down 1 pct, Dec up 4 pct * 9-month revenue 1.31 bln stg vs 1.47 bln stg

* Extends lead over BBC1 in peak time viewing

* Repays 75 mln stg of debt after convertible bond issue

* Shares up more than 8 percent

(Adds details from conference call, share price)

By Julie Crust

LONDON, Nov 5 (Reuters) - ITV Plc (ITV.L), Britain's biggest commercial free-to-air broadcaster, forecast a surprise upturn in advertising next month, sending its shares up more than 8 percent.

The company, home to shows such as X Factor and Coronation Street, said on Thursday its ITV1 channel was extending its lead over BBC1 [BBC.UL] in peak time viewing, helping lure advertisers and allowing it to forecast a 4 percent rise in net advertising revenue (NAR) in December.

The increase would be the first monthly gain since the first half of 2008 and could end a dismal period in which ITV seemed to be inexorably losing viewers and advertising revenue.

"We brought forward this announcement in view of the significant improvement in trading, over and above the improvement confirmed in our trading update last month," said Chief Operating Officer John Cresswell on a conference call. [ID:nLD551877]

"We continue to see the quarterly trend in our TV advertising performance improving."

The broadcaster, which is still struggling to find a new chairman and chief executive, expects NAR in November to fall 1 percent, better than the decline of around 3 percent forecast last month, and NAR for the fourth quarter to be flat, taking the full year down 12 percent after the worst advertising recession on record.

IMPROVING OUTLOOK

Total revenue for the nine months fell 11 percent to 1.31 billion pounds ($2.2 billion).

"Whilst our visibility is limited, the outlook for the fourth quarter has continued to improve and ITV is continuing to outperform the market," said Cresswell.

"With further cost savings and a strong schedule in 2010, including the World Cup, we are confident that ITV is well-positioned to benefit from any market recovery."

A 4 percent rise in December's advertising revenue would be the strongest monthly year-on-year increase since the back end of 2007, he said.

The growth in ad revenue is principally being fuelled by food retailers, with some recovery across finance and cosmetics, Finance Director Ian Griffiths said on a conference call.

"COI (Central Office of Information)/government spend and retail spend, which has been resilient all year, is continuing to come through quite nicely," he said.

ITV shares were up 7.6 percent at 47.89 pence by 0942 GMT, having risen as high as 48.47p.

Analysts at UBS said: "Given the better-than-expected exit rate from Q4 2009, expectations for NAR growth in 2010 may also be raised."

ITV said cost savings were on track and it was set to deliver 155 million pound of savings in 2009. It also said it repaid 75 million pounds of debt following a convertible bond issue.

Its pension deficit grew to 655 million pounds at the end of September, from 538 million the preceding quarter, although the company said initiatives under discussion could reduce the deficit by around 75 to 100 million pounds. (Editing by Matt Scuffham and David Holmes) ($1=.6071 Pound)