UPDATE 1-RESEARCH ALERT-Goldman raises US coal sector to neutral

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March 26 (Reuters) - Goldman Sachs raised its rating on the U.S. coal sector to "neutral" from "cautious" and upgraded two companies to "buy," citing in part a strong steel market that uses coal.

"Given that valuation has retracted, we feel that now is a good time to take profits on our cautious coverage view and upgrade to neutral," Goldman said about the sector in a note.

Goldman raised Alpha Natural Resources Inc (ANR.N) and Consol Energy Inc (CNX.N) to "buy," and Arch Coal Inc (ACI.N), International Coal Group Inc (ICO.N) and Massey Energy Co (MEE.N) to "neutral."

The investment bank recommended a pairing of Alpha Natural and Foundation Coal Holdings Inc (FCL.N), rated at "sell," and said this duo has 44 percent return potential.

This team also has a feasible mix of metallurgical coal production and thermal coal production that would help in ironing out sector and market volatility, Goldman said.

Goldman raised its price target on Foundation Coal to $47 from $45. It also increased its target on Arch Coal to $44 from $35.

Foundation Coal shares were trading up 2 percent at $51.85 closed, while Arch Coal shares were trading up 3 percent at $44.99 in early morning trade on the New York Stock Exchange. (Reporting by Varsha Tickoo in Bangalore; Editing by Amitha Rajan)