Japan's Panasonic Corp <6752.T> reported a smaller-than-expected quarterly loss and sharply lifted its half-year outlook as it cuts costs to cope with a firmer yen and weak TV sales, but stuck to its outlook for a second annual net loss.

Panasonic saw sales of its electronics gadgets slow as the global downturn forced consumers to tighten their purse strings, while sluggish corporate capital spending hit demand for its factory automation equipment.

Like arch-rival Sony Corp <6758.T>, Panasonic logged a first quarter that beat market expectations and signaled a bottoming-out in demand, but both cautioned that it was still too early to call a recovery.

Panasonic is shutting 40 manufacturing sites and shedding 15,000 jobs to counter the headwind and better compete with Sony, Samsung Electronics Co Ltd <005930.KS> and LG Electronics Inc <066570.KS>.

Panasonic, which vies with Sony for the title of the world's largest consumer electronics maker, kept its net loss forecast of 195 billion yen ($2.06 billion) for the year to next March, although it halved its net loss forecast for the six months to September to 100 billion yen.

The guidance suggests Panasonic will regain an operating profit in Q2, and I think we will see signs of improvement in cost efficiency, said Seiichiro Iwamoto, a senior fund manager at Mizuho Asset Management.

But that doesn't mean that the full-year outlook is conservative. It's not yet clear whether Panasonic's flat TV and device sales will grow as planned.

Sluggish consumer sentiment in the U.S. and in Europe could continue to weigh on prices of flat TVs, even as the year-end shopping season approaches, he said.

Panasonic's outlook represents a net loss for the full year to next March that is half as big as its 379 billion yen loss last year but worse than the consensus of a 185 billion yen loss in a poll of 18 analysts by Reuters.

At the operating level, which shows a company's core earnings strength and comes before restructuring charges in Panasonic's accounting method, it maintained its annual outlook for a 75 billion yen profit, up 3 percent.

In an effort to improve profitability by boosting its presence in the green energy business, Panasonic is planning to acquire Sanyo Electric Co Ltd <6764.T>, the world's largest maker of rechargeable batteries.

The merged entity would be a dominant player in auto batteries for hybrid cars, which are enjoying strong demand.

In April-June, the maker of Viera flat TVs and Lumix digital cameras booked a net loss of 53 billion yen, down from a 73 billion yen profit a year earlier and compared with analysts' estimate of a 58 billion yen loss.

The quarterly loss was much smaller than a 444.3 billion yen loss in the previous three months, but still lags the performance of its South Korean rivals.

The probability of a full-year (operating) profit has increased, Panasonic Director Makoto Uenoyama told reporters at a news conference.

But we can't see what is in store for the second half until around October. At this point, the outlook isn't clear enough for us to change our full-year forecast, he said.

Helped in part by a softer won, both Samsung and LG posted a bigger net profit in the latest quarter than a year earlier. Shares in Panasonic closed up 0.1 percent at 1,502 yen ahead of the earnings announcement, slightly underperforming the Tokyo stock market's electrical machinery index <.IELEC.T>, which rose 0.4 percent.

The stock has gained 41 percent since April, while the sector index has put on 34 percent.

($1=94.73 Yen)

(Additional reporting by Mayumi Negishi; Editing by Michael Watson)