Toyota Motor Corp said its biggest ever safety recall would cost it up to $2 billion this quarter, but raised its outlook for the financial year to March after a forecast-beating third-quarter.

Toyota's recall of more than 8 million vehicles due to problems with unintended acceleration has punished its share price, dented its reputation and overshadowed what until just two weeks ago had been expected to be an upbeat story of improving earnings.

Automakers enjoyed a boost in demand in the latter part of 2009, thanks largely to government incentives designed to spur sales and improving access to credit as the global economy recovered.

Toyota was one of the biggest beneficiaries of the U.S. cash-for-clunkers scheme but has faced a firestorm of criticism in recent weeks for its handling of recalls centered there.

There are more doubts about Toyota's ability to make sure clients are content with the quality of its cars, said Benedicte Mougeot, fund manager of HSBC GIF Japanese equity fund, in Hong Kong.

The company's forecast earnings and profitability will surely decrease because of the recall. Taking into account the increased risk and reduced profitability, we will review our investment.

With less than two months left in the current financial year, Toyota slashed what most analysts had considered an excessively conservative operating loss forecast to 20 billion yen ($220 million) from 350 billion yen.

That compares with a 38 billion yen annual loss forecast in a survey of 19 brokerages by Thomson Reuters I/B/E/S.

Starmine SmartEstimates, which predicts earnings by putting more weight on recent forecasts of top-rated analysts, has Toyota posting an operating profit of 26 billion yen this year, and improving to 647 billion yen next year.

A Toyota official said the new forecasts for the current year took into account an estimated 100 billion yen in costs for the recalls and a further 70-80 billion yen in lost sales. The figure was in line with analysts estimates.

Toyota posted October-December operating profit of 189 billion yen, easily beating a 99 billion yen estimated by Thomson Reuters I/B/E/S. It was its strongest profit in six quarters.

Investors are now focused on how long and far the recall damage could go, with Toyota's sales in its most important U.S. market already falling 16 percent in January -- enough to knock it to third place, below Ford Motor Co.

Toyota raised its forecast for group global sales to 7.18 million vehicles from 7.03 million, and also raised the amount of money it expects to save under emergency profit measures introduced earlier this year to 1.59 trillion yen from 1.25 trillion yen.

The big question mark for the new year, starting in April, is how long and how badly sales will be affected as a result of bad publicity and a scarred brand image, as well as the unknown scope of litigation and other costs.

Shares in Toyota have lost as much as 23 percent, or $30 billion, in the two weeks since it announced a multi-million-vehicle recall for sticky accelerator pedals in North America.

They slid to a 10-month low on Thursday after the Obama administration stepped up the pressure on the world's largest carmaker to address a range of safety issues.

(Editing by Lincoln Feast)

($1=90.99 Yen)