Home Depot Inc said earnings could be flat this year, rather than falling as it previously forecast, saying the worst of the U.S. housing correction had passed.

Shares of the world's largest home improvement retailer, whose sales have suffered from the housing crisis and recession, rose 1.5 percent on Wednesday.

Home Depot expects earnings per share from continuing operations to be flat to down 7 percent this year, compared with its previous forecast of a 7 percent decline.

Based on a profit of $1.37 per share in the fiscal year that ended on February 1, that means a forecast of $1.27 to $1.37, compared with the average Wall Street estimate of $1.33.

Economic indicators are signaling that the worst of the housing downturn is over, Home Depot Chief Executive Frank Blake said in a meeting with analysts.

On an adjusted basis, the company expects earnings per share from continuing operations to fall by 20 percent to 26 percent, compared with its previous forecast of a 26 percent decline. That yields a forecast of $1.32 to $1.42 a share, compared with the analysts' average estimate of $1.41 and last year's profit of $1.78.

Home Depot still expects sales to fall by about 9 percent this year, with sales at stores open at least a year down in a high-single-digit percentage range. It expects gross margins to be flat to slightly higher.

The company said it should be able to achieve an operating margin of about 10 percent and a return on invested capital of about 15 percent over the long term, helped by improvements in customer service, products, productivity and efficiency, and a revival in the home improvement market.

It did not provide a time frame for that long-term operating target.

Home Depot has been upgrading service and products in its stores to win back market share from rival Lowe's Cos Inc .

Earlier this year, Home Depot announced plans to freeze officers' salaries and close certain specialty outlets to save money in the recession and prolonged U.S. housing slump.

The Atlanta-based company, which shed about 7,000 jobs earlier this year, cut operating expenses 16.4 percent in the first quarter, which ended on May 3.

Shares of Home Depot were up 1.5 percent at $24.72 in morning New York Stock Exchange trading, while Lowe's rose 1.2 percent to $20.70.

(Reporting by Jessica Wohl; Editing by Derek Caney and Lisa Von Ahn)