UPDATE 3-Home Depot profit falls, but beats Wall St view

* Q3 EPS of 45 cents vs. 39 cent estimate

* Stands by full-year profit forecast

* Sees FY sales down 8 pct, pvs view was 5 pct drop

* Home Depot stock up, Lowe's turns lower (Adds analyst, company comment)

By Karen Jacobs

ATLANTA, Nov 18 (Reuters) - Home Depot Inc (HD.N) reported a higher-than-expected quarterly profit on Tuesday as it reduced price markdowns in the face of lower sales and a weak economy, sending its shares up as much as 7 percent.

The world's largest home improvement retailer said it expected a steeper drop in full-year sales as the U.S. housing slump and difficult economic conditions hurt demand.

"This company continues to perform well in a challenging environment," said Stephanie Hoff, senior retail analyst with Edward Jones. "Home Depot was able to demonstrate great inventory control."

On Monday, rival Lowe's Cos Inc (LOW.N) topped earnings expectations as demand for hurricane-related goods and outdoor products helped offset weakness in big-ticket sales. [ID:nN12293846] On Tuesday, Lowe's shares rose as much as 2.6 percent before turning lower along with the overall market in early afternoon trading.

Home Depot and Lowe's have posted quarterly profit declines for more than a year as falling home values and tighter credit led consumers to put off pricey projects such as kitchen remodels.

But sales of some basic repair goods have held up as consumers maintain their homes. Home Depot said on Tuesday that a new program offering lower prices on more than 1,000 items helped increase transactions at the end of the quarter.

"While other retailers are just experiencing a downturn in 2008, Home Depot and Lowe's have experienced it since 2006," Hoff said. "It's only going to take stabilization in the housing market for sales to start to improve."

Both companies have been cautious on pinpointing when a U.S. housing recovery could begin. On Monday, Lowe's Chief Executive Robert Niblock told Reuters a rebound was not likely to occur until 2010, based on economic forecasts.

BETTER MARGINS

At Home Depot, earnings fell 31 percent to $756 million, or 45 cents a share, for the third quarter ended Nov. 2, down from $1.1 billion, or 60 cents a share, a year earlier.

Analysts had expected 39 cents a share, according to Reuters Estimates.