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   By Ana Campoy and Mike Barris

Dow Chemical Co. (DOW) reported a loss in the second quarter as aggressive cost cutting and an uptick in demand for its chemical and plastics products weren't enough to offset costs associated with its purchase of rival Rohm & Haas Co.

Excluding the costs of the merger and other charges, Dow would have posted a profit, but overall sales revenues in the quarter were still disappointing, down 31% from the year-ago period as consumers and industry continued to curb spending in the weakened global economy.

Although the company expects business conditions to brighten in the third quarter, it isn't counting on a significant turnaround for the rest of the year. That outlook "is prudent given the growing uncertainty in the global economy," said Chairman and Chief Executive Andrew Liveris during a conference call with analysts.

The chemical sector, which makes the building-block materials for most consumer products, has been pummeled by the global economic downturn as manufacturers cut back production and slashed inventories. In response, companies such as Dow ratcheted back its own production, shuttered plants and cut thousands of jobs. Since the beginning of the year, Dow said it cut costs by $600 million.

Business picked up in the second quarter amid signs that customers are no longer reducing inventories. Demand in China improved too, as the government's stimulus package sparked purchases of building materials and consumer products such as electronics. Sales jumped 20% from the first quarter at Dow units that make materials used in electronics and paints.

On Thursday afternoon, the company's shares rose 5% to $21.31 on the New York Stock Exchange.

Still, many chemical companies expect overall global demand to remain weak in coming months. German chemical giant BASF SE (BAS.XE) on Thursday cut its full-year outlook after second-quarter net profit fell 74%; U.S.-based DuPont Co. (DD), which posted a 61% decline in profit last week, expects sales volumes in the third quarter to remain below year-ago levels.

Dow's second-quarter loss came to $344 million, or 47 cents a share, compared with a year-earlier profit of $762 million, or 81 cents a share. Excluding restructuring and other charges, Dow would have earned 5 cents compared to the 8-cent loss analysts polled by Thomson Reuters had anticipated. Revenue fell to $11.3 billion from $16.3 billion in the year-ago period.

For Dow, the economic downturn comes at a time when it is reorganizing its business to absorb the $16.3 billion acquisition of Rohm & Haas earlier this year and managing the heavy debt load it incurred to buy it.

"They are obviously getting things done, but it's a very difficult environment that they are operating in," said Michael Judd, an independent analyst who runs Greenwich Consultants.

On Thursday, Dow said it is selling its stake in OPTIMAL, a Kuala Lumpur-based commodity chemical joint venture, to partner Petroliam Nasional Berhad, Malaysia's state-owned oil company, for $660 million. The proceeds will help repay a short-term loan the company used to for the Rohm & Haas purchase.

The company also is looking to divest other assets, possibly including part of its profitable AgroSciences unit.

Dow is in talks with a Kuwait state-owned energy company and two other state-owned oil companies about forming a joint venture that would control some of Dow's basic-chemical businesses. A joint-venture with Kuwait fell apart last year.

On Thursday, Dow said it reorganized several latex, rubber and plastic businesses it wants to sell into a new unit called Styron Corp. It could fetch about $1 billion or $2 billion, said Liveris.

(Allison Connolly contributed to this report)