UPDATE 3-Sandvik Q3 beats forecast but demand slowing

* Sandvik Q3 pretax profit just above consensus

* Says financial crisis hit demand toward end of Q3

* To adjust costs, production to weaker demand

* Stock up 11 percent, outperforms index

(Adds company comment, updates share price)

By Niklas Pollard and Johannes Hellstrom

STOCKHOLM, Oct 30 (Reuters) - Tool and machinery maker Sandvik reported third-quarter pretax earnings above market expectations on Thursday, sending its shares higher, and said it was cutting costs to meet a recent fall in demand.

The engineering group posted a pretax profit of 3.04 billion Swedish crowns ($393 million), down from 3.10 billion a year ago but above the mean forecast of 3.00 billion seen in a Reuters poll of analysts.

Sandvik shares were up 11 percent by 1100 GMT, outperforming a 5.1 percent gain in the Stockholm bourse's blue-chip index.

"It's very welcome to see a report that is absolutely not weaker than expected since there had been some signs of nervousness regarding Sandvik at a company level, but also to some extent about the wider economy," Nordea analyst Johan Trocme said.

"And cautious comments about the outlook were expected," he added.

After years of strong demand, the Nordic country's top-flight engineering companies face the prospect of the global financial crisis pushing the economies of their main export markets into recession.

Sandvik, whose sales rose in line with expectations to 22.5 billion crowns, from 21.2 billion a year ago, said the turmoil in financial markets had influenced the business climate and resulted in weaker demand in some segments of its business.

The company said it was taking "measures in order to adjust costs and production capacity" after learning its customers were planning production cuts and postponing projects.

"We were entering a slowdown in any case, but the financial crisis and the liquidity crisis in the market has meant that it has hit nearly all markets and segments more or less at the same time," Sandvik Chief Executive Lars Pettersson said.

GROWING GLOOM

The comments were in line with recent gloomier outlooks from several of Sandvik's main competitors.

Last week, Swedish rival Atlas Copco said it saw demand softening in the near term as the impact of the financial crisis reverberated through its main markets.

U.S. industrial tools makers Kennametal was similarly sombre, cutting its full-year forecast due to the uncertain global economy.

Order bookings at the Sweden-based maker of metalworking tools, mining equipment and specialty steels, still rose to 22.1 billion crowns in the quarter from 21.3 billion a year earlier, just lagging the analyst poll's mean forecast of 22.2 billion.

"In September, there were clear signals that the remainder of the year would be affected by production cutbacks," Sandvik said.

"Primarily within the automotive industry in the U.S. and Europe, but also within the construction industry and certain consumer-related applications."

Pettersson said Sandvik was accelerating plans to shed 900 jobs in its Materials Technology unit and it was also reviewing potential cuts in its other two business areas, Tooling and Mining and Construction.

"We quite simply need to adjust our output," he said.

"We will use the agreements we have about flexible working hours, we have that at nearly all our plants, so that we can simply close down production completely for a week or two."

Sandvik said its earnings were stung by a fall in metal prices, which lowered the value of the metal it holds in stock by 114 million crowns in the third quarter, while favourable currency hedging contracts boosted earnings by 225 million.

It said it expected inventory revaluations to dent earnings to the tune of about 300 million crowns in the fourth quarter, while currency levels were seen having a positive impact of between 150 million to 200 million. (Editing by Simon Jessop)