UPDATE 2-Illinois Tool Works lowers outlook, shares fall

(Adds estimate, analyst quotes, byline, updates share movement)

By Helen Chernikoff

NEW YORK, Oct 7 (Reuters) - Diversified manufacturer Illinois Tool Works Inc (ITW.N) lowered its third-quarter and full-year forecasts on Tuesday, and its shares fell.

Citing a September slowdown in North American industrial production, the maker of industrial products such as screws, plastic film and packaging said it expects to report third-quarter earnings per share from continuing operations in the range of 82 to 86 cents per share, down from previous forecasts of 93 to 99 cents per share.

Analysts had predicted third-quarter profit of 91 cents per share, according to Reuters Estimates.

"ITW is a proxy for industrial activity," exposed to downturns in the auto and housing industry and in Europe, said Eli Lustgarten, an analyst at Longbow Research. "So it doesn't take much to realize that there's some vulnerability in their numbers."

Other diversified industrial companies such as Ingersoll Rand Co (IR.N) and Eaton Corp (ETN.N) will likely follow ITW in lowering expectations, said Morningstar analyst John Kearney.

"I don't think anybody's immune to what's going on," said Morningstar analyst John Kearney.

Such companies have managed to avoid disappointing earnings expectations until now because they have compensated for weakness in autos and housing in the U.S. by expanding overseas, thereby diversifying their sources of revenue, Kearney said.

Now European economies are weakening as well.

"We're going to see those industrials who are leaning on foreign markets to prop up their results follow with more revisions and disappointments for the third quarter," Kearney said.

Illinois Tool has an estimated 20 to 25 percent of its sales in Western Europe, wrote Citigroup analyst David Raso, who has a "hold" rating and a $45 price target on the shares.

For the year, Illinois Tool sees earnings per share from continuing operations between $3.22 and $3.34. Previously, the company had forecast profit per share in the range of $3.40 to $3.52.

Glenview, Illinois-based Illinois Tool said margins have suffered because broad economic weakness has made it harder to implement price increases that would recover higher raw material costs.

Illinois Tool's shares were down 4.3 percent at $37.44 in midday trade on the New York Stock Exchange. (Reporting by Helen Chernikoff, editing by Gerald E. McCormick)