By Meredith Davis

(Reuters) - Caterpillar Inc <CAT.N> shares rallied Tuesday on better-than-expected second quarter earnings, even as the heavy machinery maker lowered its full-year forecast amid sluggish demand in mining and other industries.

Caterpillar shares, part of the Dow Jones industrial average <.DJI>, rose 4.7 percent to their highest level this year.

"They cut (full-year) guidance but they did beat this quarter. They seem to be setting themselves up for at least being able to meet or beat expectations in the future by addressing it now," said Jim Corridore, analyst at S&P Global Market Intelligence.

"The company controlled costs during the quarter and, given a very difficult environment, they are executing well," Corridore said.

Caterpillar said global uncertainty persists, and the recent vote in Britain to leave the European Union and the attempted coup in Turkey have heightened risks, especially in Europe.

A weakened global economy, combined with persistent political uncertainty, kept sales of new machinery sluggish. Sales fell 16 percent to $10.34 billion from a year ago.

"We're not expecting an upturn in important industries like mining, oil and gas and rail to happen this year," Chief Executive Doug Oberhelman said in a statement.

The company said commodity prices "appear to have stabilized, but at low levels."


The company's $1.09 in earnings per share, excluding restructuring costs, was above analysts' expectations of 96 cents.

Despite better-than-predicted second-quarter earnings, the world's largest construction and mining equipment maker lowered its full-year sales and profit forecast for the second time this year. It now expects 2016 sales between $40 billion and $40.5 billion, down from $40 billion to $42 billion.

Caterpillar expects 2016 earnings of $2.75 per share, or $3.55 excluding restructuring costs, down from $3.00, or $3.70 excluding restructuring costs.

It also raised estimated expenses for restructuring during 2016 to $700 million, from $550 million.

In 2015, Caterpillar announced a restructuring plan that would cut more than 10,000 jobs and consolidate or close manufacturing facilities through 2018. So far, it reduced global full-time and flexible workforce by 13,900 to 100,000 employees, and said Tuesday there are plans for additional reductions.

With regard to the Nov. 8 U.S. presidential election, Chief Financial Officer Brad Halverson noted there has been a lot of discussion about trade. The company would like to see policy that would help create jobs, one of which is free trade, Halverson said, as over half of the company's products manufactured at two plants in Illinois are exported.

"Our ability to be able to compete in a global environment is important to our business. Free-trade would be important to creating jobs in the U.S.," Halverson said in an interview.

(Reporting By Meredith Davis in Chicago; additional reporting by Nick Carey; Editing by Nick Zieminski)