UPDATE 2-Smith & Nephew tops forecasts, sees mkt stabilising

* Adjusted EPS 16.8 cents vs consensus 14 cents

* Says market showing early signs of stabilising

* Guidance unchanged

* Shares up as much as 3.5 percent, reach month high (Adds CEO comments, share price, analyst reaction)

By Ben Deighton

LONDON, Nov 6 (Reuters) - Smith & Nephew Plc (SN.L), Europe's leading maker of replacement hips and knees, said there were early signs of its market stabilising as patients in the United States resume spending on surgical procedures.

Shares in Smith & Nephew rose as much as 3.5 percent to a month high of 559 pence on Friday after the group also posted better-than-expected third quarter earnings.

"We saw the volumes in the U.S. market particularly increase a little bit over the second quarter sequentially, so (there has been) a couple of percent increase in volumes, so that was a good sign," S&N Chief Executive David Illingworth told reporters.

"We're not seeing anything unusual on the pricing side other than the things that we've been dealing with for a while now," he said, noting these were early signs of the market stabilising.

Third quarter adjusted earnings per share reached 16.8 cents against an average of 14 cents expected by seven analysts polled by Thomson Reuters I/B/E/S.

Revenue increased by 1 percent to $915 million, compared with an average forecast of $908 million.

The company also maintained its guidance and said its margin improved 410 basis points to 22.8 percent. It plans to lift its trading margin to 24.5 percent by 2010.

Analyst Charles Weston at Nomura Code reiterated his "neutral" recommendation on the stock and said the results beat his expectations and boosted his confidence that the company would meet its trading margin goal.

S&N shares erased initial gains to be down 1 percent at 534p by 0928 GMT. (Editing by David Jones and David Holmes)