UPDATE 4-Eaton profit beats estimates, shares jump

* Q2 shares ex items $0.23 vs $0.14 expected

* Q2 sales down 32 pct to $2.90 bln

* Dividend maintained

* Shares up 8 pct (Adds portfolio manager comment, updates shares)

NEW YORK, July 20 (Reuters) - Diversified manufacturer Eaton Corp (ETN.N), a maker of hydraulics, electrical control systems and truck transmissions, reported a higher-than-expected quarterly profit on Monday and said it would maintain its dividend, sending shares up 8 percent.

The company slashed its own earnings forecast, citing weakness across its markets, but said it expected 2009 earnings to come in above Wall Street estimates.

Net earnings for the second quarter dropped sharply to $31 million, or 17 cents a share, from $337 million, or $2.03 per share, a year earlier.

Excluding acquisition-related charges, Eaton earned 23 cents a share. Analysts on average had expected 14 cents, according to Reuters Estimates. In April, Eaton had forecast earnings at about 25 cents.

Revenue fell 32 percent to $2.9 billion, compared with Wall Street forecasts of $3 billion.

Eaton said it was maintaining its $2 annual dividend -- one of the highest among industrial companies -- despite analyst speculation that the company would reduce the payout to conserve cash.

Its shares rose 8 percent, or $3.55 to $48.46 in afternoon trading on the New York Stock Exchange, after earlier gaining as much as 11 percent.

Part of the rally was due to the dividend news, said Jeff Markunas, manager of the RidgeWorth Large Cap Core Equity Fund, which owns about 100,000 Eaton shares.

"They can tough this out and they'll maintain the dividend because they have the earnings power to support it beyond this year," he said.

Markunas added the second quarter was likely the washout quarter for industrial companies that don't have financing subsidiaries, like Eaton, and beating dramatically reduced expectations could emerge as an earnings-season theme for industrial companies.

"Things are probably reaching the all-bad mark; but just as important, expectations have gotten lower," Markunas said.

"People have ... managed to get their expectations lower than the aggressive cost cutting actions these companies have managed to engineer. These aren't good quarters by any stretch of the imagination; they're simply less bad than the expectations were."