UBS remained wary on its immediate outlook as it braced for the recession's full impact after a first quarter loss, but its shares rose as resilient capital ratios cut the need for a balance sheet boost.

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

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 as it expected credit-related provisioning to rise in the coming quarters.

UBS confirmed on Tuesday it had made a first quarter net loss of 2 billion Swiss francs ($1.76 billion), contrasting with a strong three months for Credit Suisse and European rivals such as Deutsche Bank and Barclays.

But the Swiss bank reported a Tier 1 ratio of 10.5 percent, above the 10 percent guidance it gave on April 15 as it pre-announced results. Chief Financial Officer John Cryan also said client withdrawals were slowing. UBS also said it cut its balance sheet by 8 percent in the quarter.

UBS' capital ratios have improved and there is no capital increase coming up. People are getting excited because of that, said Dirk Becker, an analyst with Kepler Equities.

Shares were up 3.8 percent at 16.31 Swiss francs at 1055 GMT, underperforming the DJ Stoxx European banking sector, which was up 4.3 percent.

Traders said the absence of negative surprises from UBS' statement and slowing client outflows helped the shares.

They managed to reduce outflows and there is an overall sense of relief that results were not worse than expected, said Vontobel analyst Teresa Nielsen.

STILL CAUTIOUS

UBS, one of Europe's worst-hit banks in the crisis, made more than $50 billion of writedowns that prompted a government rescue in October and the naming of new top management this year.

Its Tier 1 ratio would have been 11 percent if the effects of the $2.5 billion sale of Brazilian unit Pactual, which forced UBS to book an impairment charge in the first quarter, had been included. Cryan said UBS would consider small sales to further boost its capital base, but ruled out selling entire divisions.

While Credit Suisse's Tier 1 ratio was 14.1 percent, one of the strongest in the industry, Cryan said UBS's capital position was still strong compared with many other banking 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.

Some analysts, however, remained cautious on UBS' prospects to return to profit as the bank is still saddled with toxic assets, including monoline exposures that forced it to write down 1.9 billion francs in the first quarter.

These legacy positions were just outsized and it is taking some time to wash them out, Cryan told an analysts' call.

UBS also gave more details on big job cuts it announced last month, saying 6,500 posts would go at the bank's treasured wealth management units and 2,500 at the investment bank.

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, said Sebastien Lemaire at Natixis.

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 the bank announced in February it had agreed to pay a fine to avoid criminal charges. But he said that outflows had been slowed down now that UBS was less in the spotlight.

UBS 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.

($1=1.139 Swiss Franc)

(Editing by Simon Jessop and Mike Nesbit)