FedEx Corp , the world's No. 2 package delivery company, cut its full-year profit outlook, citing fuel prices and weak global economic growth, sending its shares down as much as 11 percent to a two-year low.

Chief Executive Fred Smith said he did not expect economic conditions to improve much any time soon, although he did not expect the United States to dip back into recession.

We expect sluggish economic growth will continue, largely due to a lack of confidence that U.S. and European policy makers will effectively address current economic challenges, Smith said on a conference call to discuss quarterly results.

The sour mood of the consumer, which is compelling companies around the world to squeeze costs and hold down inventories, remains the biggest drag on the economic growth that FedEx needs to give its business a boost, company executives said on the call on Thursday.

With inventories low, FedEx expects to benefit if there is an uptick in demand in the run-up to the holiday shopping season and retailers needed fast delivery. Much is also riding on robust online orders. But for now, things remain subdued.

Our customers' hair is not on fire, said FedEx Chief Financial Officer Alan Graf. They're just saying, you know, we're going to be steady as she goes, so it just feels completely different than it did back in 2008.

The sheer volume of goods moved by FedEx makes its shipment trends a bellwether for consumer demand and economic growth. The value of packages handled by FedEx's trucks and planes every year is equivalent to about 4 percent of U.S. gross domestic product and 1.5 percent of global GDP.

FedEx, which is also being hurt by a slowdown in international trade, reported earnings of $1.46 per share, just beating the average analyst estimate of $1.45, according to Thomson Reuters I/B/E/S/. (For a graphic, see http://r.reuters.com/kys83s )

FedEx shares were down 8.9 percent at $66.04 in afternoon trading, well below their year-high of $98.66 in July.

It's a cheap stock, and if this is a slowdown it's probably an opportunity to buy. But if it's more an indication of recession then I would say you wouldn't want to own it, said Donald Porter at Dalton, Greiner, Hartman, Maher & Co, which holds shares in rival United Parcel Service .

To help counter falling volumes in the Express division, its biggest, FedEx said it would raise shipping rates by a net 3.9 percent on average for U.S. domestic, U.S. export and U.S. import services from January 2.

The company so far has had little resistance to rate increases, the latest of which went into effect this month.

Memphis, Tennessee-based FedEx reiterated its $4.2 billion capital expenditure plan for the year ending next May. The company is considering buying about 50 wide-body freighters from Boeing Co and Airbus to update its fleet to more fuel-efficient models.

ASIAN VOLUMES DOWN

At FedEx Express, which represents more than 60 percent of total revenue, domestic revenue per package rose 13 percent in the three months ended August 31, mainly due to higher fuel surcharges and increased weight per package. Average daily package volume dropped 3 percent.

Volume fell 4 percent in the division's international unit, mainly due to a decline in traffic from Asia. Revenue per package grew 16 percent, helped by favorable exchange rates.

FedEx is the world's biggest air cargo carrier, a fact that Fred Labatt, director of equity research at South Texas Money Management, said made it more vulnerable than UPS to weakness in international trade.

The stock is going to be more sensitive than UPS, which has a lot more ground and less air, he said. On the other hand, the yields were better pretty much across the board in all the segments, which means they're getting pricing and the company's doing a really good job of managing their costs, said Labatt, whose firm holds FedEx shares.

FedEx said fiscal first-quarter profit, which slightly beat forecasts, rose to $464 million, or $1.46 per share, from $380 million, or $1.20 per share, a year ago. Analysts, on average, had expected a profit of $1.45 per share.

The company cut its forecast for earnings for the year to May 2012 to $6.25 to $6.75 per share from its June estimate of between $6.35 and $6.85.

Revenue rose 11 percent to $10.52 billion from $9.46 billion a year earlier. That was above the average forecast of $10.32 billion.

With the stock down about 30 percent this year, FedEx said it planned to buy back 5.7 million shares under its existing repurchase authorization.

The Dow Jones Transportation average <.DJT> has dropped about 19 percent this year while UPS shares have fallen about 14 percent.

UPS, the world's biggest package delivery company, last week affirmed its call for record earnings in 2011, downplaying the likelihood of a double-dip recession.

Its shares were down 3.7 percent at $61.97 at midday.

(Reporting by Lynn Adler in New York, editing by Dave Zimmerman, Maureen Bavdek and Matthew Lewis and Ted Kerr)

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