UBS remained wary on its immediate outlook as it braced for the full impact of the recession after confirming it had posted a first quarter loss on yet more writedowns and client withdrawals.

Despite a strong rebound in stock markets in recent weeks, UBS said the global economy has continued to deteriorate and its home market Switzerland will not be spared. The Swiss economy is set to contract by up to 3 percent this year.

The markets continue to be unsettled, and we remain cautious on the immediate outlook for UBS, the world's largest wealth manager said in a statement.

The loss contrasts with competitor Credit Suisse's first-quarter profit of 2 billion Swiss francs and gains by European rivals such as Deutsche Bank and Barclays .

Risky investments by UBS's investment bank in complex U.S. financial products have forced it to make more than $50 billion in writedowns and turned to the Swiss government for help.

UBS, which still holds billions of dollars of illiquid assets despite transferring many of those to the Swiss central bank, indicated credit-related provisions would rise in the coming quarters and said the teetering economy was starting to impact on loans to small firms.

The Swiss economy is slowing down and there is a lag effect for banks that has yet to make itself visible, UBS Chief Financial Officer John Cryan told a conference call.

Shares were up 4.6 percent at 16.42 Swiss francs at 0802 GMT, outperforming the DJ Stoxx European banking sector <.SX7P>, in what traders saw as some short-covering after the stock fell the previous day.

OUTLOOK STILL CLOUDY

The bank confirmed it had made a first quarter net loss of 2 billion Swiss francs ($1.76 billion) as announced by new Chief Executive Oswald Gruebel on April 15.

Gruebel said the same day that the bank was still facing an uncertain future and announced 8,700 job cuts.

There is some good news, including the outflows in private banking, which are less worse than what could have been expected, said analyst Sebastien Lemaire at Natixis Securities.

But the environment is still very cloudy for UBS in terms of mark-downs in the coming quarters, in terms of cost of risks for the investment bank and now they are talking about some accounting errors.

UBS said it restated its 2008 accounts to correct accounting errors that raised the full-year loss, already the biggest in Swiss corporate history, by a further 405 million francs.

UBS said client withdrawals at its core wealth management and Swiss bank unit slowed to 23.4 billion francs in the quarter while its wealth management Americas business saw inflows of 16.2 billion francs, in line with what it announced in April.

Cryan said news on a U.S. tax fraud probe into UBS had prompted wealthy clients to withdraw money, in particular after UBS announced in February it had paid a large fine to avoid criminal charges. But he said that outflows had been slowing down now that there were fewer headlines on the case.

The global asset management business saw net new money outflows slowing to 7.7 billion francs.

UBS was also hit by a goodwill impairment of 631 million francs from the sale of Brazilian unit Pactual and severance costs of 184 million francs. It expects about 650 million of restructuring and severance charges in the second quarter.

UBS, which is struggling to curb it large balance sheet, said it had further reduced risks on the first quarter, bringing total risk-weighted assets to 277.7 billion francs.

Its Tier 1 ratio, a key measure of financial strength, was 10.5 percent at the end of the quarter, but would have been 11 percent if the effects of the Pactual sale had been included.

Cryan said UBS would consider selling small, non-core areas of business to boost its Tier 1, but not entire divisions.

While Credit Suisse's Tier 1 ratio was 14.1 percent at the end of the first quarter, Cryan said UBS's capital position was still strong compared with many rivals.

About 10 of the 19 largest U.S. banks being stress tested will be instructed by regulators to raise more capital, a source familiar with official talks said on Tuesday.

($1=1.139 Swiss Franc)

(Editing by Simon Jessop and Mike Nesbit)