* Q3 underlying EBIT 131 million euros, beats all forecasts
* Q3 net sales 1.9 bln euros vs 1.89 bln avg in poll
* Sees Q4 deliveries flat vs Q3, price pressure continuing
* Shares rise 5.7 percent
(Adds share reaction, savings detail, analyst comment)
By Brett Young
HELSINKI, Oct 29 (Reuters) - Cost cuts and lower wood prices helped top magazine paper maker UPM-Kymmene post a smaller-than-expected fall in third-quarter profit, but weak demand will keep its mills from running at capacity.
"Economic indicators have clearly improved, but the recession continues to affect demand for all of our products," Chief Executive Jussi Pesonen said in a statement, echoing the views of rivals in the sector.
"Our demand and pricing outlook remains weak, and we will continue to curtail production in most of our businesses."
UPM posted a 39 percent drop in underlying third-quarter operating profit to 131 million euros ($194 million), topping all forecasts in a Reuters poll. Net sales fell 19 percent to 1.9 billion, in line with expectations.
UPM said lower wood prices saved it 80 million euros compared with last year, and savings from temporary and permanent job cuts saved an additional 70 million.
Top European paper and board maker Stora Enso also reported better-than-forecast underlying third-quarter earnings last week, thanks to cost cutting, but its market outlook was gloomy.
UPM shares were 5.7 percent higher at 8 euros at 0950 GMT, making it the top gainer in a firmer DJ Stoxx Basic Resources index.
"Based on dividend yield and valuation, UPM is attractive in the short term," said a Helsinki-based analyst.
"But longer term we will definitely need big capacity closures and maybe consolidation in the industry," he said.
The global paper industry has struggled for the better part of a decade to climb out of a slump as soft demand and overcapacity have kept prices down.
The current global economic downturn has further eroded demand for basic materials such as paper, as print advertising has dropped steeply. ($1=.6740 Euro) (Reporting by Brett Young, editing by Will Waterman)