* Full-year forecast 25 percent below expectations
* Domestic demand strong, overseas sales seen weak
* Spending on plants in Japan will limit profit growth
By Yuka Obayashi
TOKYO, Oct 25 (Reuters) - JFE Holdings Inc, Japan's No.2 steelmaker, said on Friday it was sticking to its full-year profit forecast, which was 25 percent below analysts' expectations, citing slack overseas markets and extra spending to upgrade facilities.
The announcement sparked a drop in JFE shares, which ended 4.2 percent lower in their heaviest volume in three months compared to a 2.8 percent drop in Tokyo's benchmark Nikkei average.
Despite trouble overseas, demand for construction and automotive steel has been strong in Japan, backed by Prime Minister Shinzo Abe's push to end two decades of economic stagnation with a mix of fiscal expansion and monetary easing, which has helped local steelmakers recover their profitability.
In fact, JFE's recurring profit, which is pretax and before one-off items, came to 39.15 billion yen ($402.05 million) in the July-September quarter, compared to a loss of 5.83 billion yen a year ago, supported by higher output and cost cuts.
But JFE, which exports about half of its steel products overseas, maintained its forecast of 170 billion yen in recurring profit for the fiscal year to March 2014. The figure is up from its year-ago profit of 52.21 billion yen, but 25 percent below a consensus estimate of 213.18 billion yen in a poll of 16 analysts in Thomson Reuters I/B/E/S.
"We have decided to spend 15 billion yen to improve facilities at our plants in Japan to maintain our competitiveness while our profit is on an upward trend," JFE executive vice president Shinichi Okada told a news conference, saying the spending will partially limit profit growth this year.
"Looking ahead through March, we have no big concerns as we think steel prices in Asia have hit the bottom and will stay as they are through March," he said.
But Okada added an increased crude steel output this year will be used for products to be sold in Japan and not for export.
JFE, the world's ninth-biggest crude steel producer by volume, plans to boost its crude steel production to 29 million tonnes this year to meet strong demand for construction and automobiles. The figure is up 1 million tonnes from a year ago, the highest level in six years.
A prolonged slump in prices in Asia brought on by massive crude steel output from China has been hitting steelmakers in the region.
On Thursday, POSCO, the world's fifth largest steelmaker, posted its steepest quarterly fall in operating profit so far this year for the July-September period, hit by declining sales and slack steel prices. Profit fell by nearly half to a lower-than-forecast 443 billion won ($417.51 million).
($1 = 97.3750 Japanese yen)
$1 = 1061.0500 Korean won Editing by Matt Driskill