Top Asian and European semiconductor manufacturers sounded a note of optimism on Wednesday as they predicted demand and prices picking up in the second half of the year.

Taiwan's UMC, the world's second-biggest contract chipmaker, Europe's top chipmaker STMicroelectronics and even struggling German competitor Infineon all forecast that this quarter's sales would beat last quarter's.

Makers of the chips used in the world's computers, mobile phones and other gadgets are starting to see a recovery as the new academic year approaches, helped by China's massive stimulus package.

The sector recovery has been in place since the second quarter and it should carry on for a while more, Michael On, managing director at Beyond Asset Management, which has $60 million of assets under management, said on Wednesday.

Earlier this month, the world's biggest chipmaker Intel said computer markets were strengthening, and fellow U.S. chipmaker Texas Instruments gave an upbeat outlook, though it was reluctant to say the worst was over.

On Wednesday, UMC said it swung to a second-quarter profit after three straight quarters of losses and expected its profitability to rise modestly this quarter, with average selling prices picking up through the year.

The Semiconductor Industry Association said earlier this month that global semiconductor sales in May rose 5.4 percent from April to $16.5 billion, though they were still 23 percent lower than in May 2008.

UMC's Chief Executive Sun Shih-wei said in a statement: We expect increased revenues for the third quarter, and will keep a close eye on the industry situation during the upcoming quarters and proceed accordingly.

In a sign of confidence, UMC raised its capital-spending target for this year to $500 million from less than $400 goal set a quarter ago. Smaller rival Chartered Semiconductor also raised its 2009 capital budget last week.

UMC shares fell 1.1 percent.

Top contract chipmaker TSMC is expected to report its largest profit in three quarters on Thursday.

VIGILANCE

Franco-Italian chipmaker STMicroelectronics said it saw signs of an improvement in the battered sector, which has remained mired at the bottom of an industry cycle for much longer than expected due to the economic downturn.

The economic context is encouraging, the first order indicators for the fourth quarter are positive, but we remain vigilant, Chief Executive Carlo Bozotti told a conference call on Wednesday.

Shares in STMicro, whose U.S.-listed stocks fell as much as 3 percent late on Tuesday, rose 2.6 percent in Paris, outperforming the European technology index, after the company reported a narrower-than-expected loss.

The company provided a relatively optimistic outlook for H209, UniCredit credit analyst Stephan Haber wrote in a note, but added: We think that indicators are too vague to already expect at this point in time a recovery in demand.

The personal computer market is expected to grow in the fourth quarter, according to IT research firm Gartner, although full-year PC shipments are forecast to be down 6 percent.

Sales volume of cell phones, the other top end market for semiconductors, is expected by most analysts to fall by about 10 percent this year.

CAUTIOUS INCREASES

German chipmaker Infineon, battling with the bankruptcy of its memory-chip subsidiary Qimonda and facing the imminent entry of U.S. activist Apollo as a major shareholder, said it saw demand gradually improving.

Infineon plans continued but cautious increases in production levels in the fourth quarter as it adapts capacity loadings to the improved demand, it said.

The company reduced its third-quarter loss to 23 million euros from a loss of 258 million euros in the second quarter. Its shares rose 4.7 percent, helping to lift the European technology index by 1.4 percent.

The memory-chip business is the toughest segment of the semiconductor industry, with the most commoditized chips and least pricing power. Market leader Samsung returned to profit last quarter, but its competitors are struggling.

Elpida, Japan's last hope in PC memory chips, recently secured a lifeline of $1.7 billion of public money. It is due to report quarterly results on August 4.

Toshiba Corp, Japan's biggest chipmaker and the world's number two in NAND flash memory used in phones, music players and memory cards, said its chip operations should turn profitable but warned of a possible year-end dip.

Price tracker DRAMeXchange said last week that mainstream MLC NAND flash contract prices would likely remain volatile until mid-August, when seasonal demand is likely to pick up.

(Additional reporting by Kelvin Soh in Taipei, Sophie Taylor in Paris, Nicola Leske in Frankfurt and Mayumi Negishi in Tokyo, editing by Will Waterman)