Toyota Motor Corp expects costs and lost sales from its largest ever safety recall to total $2 billion for the year to March, but raised its outlook after posting its strongest operating profit in six quarters.

Toyota's recall of more than 8 million vehicles due to problems with unintended acceleration has punished its share price, hurt its reputation and overshadowed what until just two weeks ago had been expected to be an upbeat story of improving earnings.

Toyota's recall this time is unlike any other in auto industry history, said Lee Sung-Jae, an analyst at Kiwoom Securities, in Seoul. The scale is huge to begin with, and this deals a fatal blow to the very core value Toyota represented -- that is the quality of its cars.

Automakers enjoyed a boost in demand in the latter part of 2009, thanks largely to government incentives designed to spur sales and improving access to credit as the global economy recovered.

Toyota was one of the biggest beneficiaries of the U.S. cash-for-clunkers scheme but is now under investigation there for its handling of the recall of a host of its most popular models after a series of crashes linked to acceleration issues.

U.S. Transportation Secretary Ray LaHood said on Wednesday he would take the unusual step of calling Toyota President Akio Toyoda to emphasize how seriously the Obama administration is taking the investigations.

Our ... people will hold Toyota's feet to the fire to make sure they are going to do everything they said they were going to do to make the vehicles safe, he said.

LOSS FORECAST SLASHED

With less than two months left in the current financial year, Toyota slashed what most analysts had considered an excessively conservative operating loss forecast to 20 billion yen ($220 million) from 350 billion yen.

A Toyota official said the new forecasts for the current year took into account an estimated 100 billion yen in costs for the recalls and a further 70-80 billion yen in lost sales, in line with analysts estimates.

Senior Managing Director Takahiko Ijichi said the company was unsure about the impact beyond the end of this financial year, but investors expressed their concerns.

There are more doubts about Toyota's ability to make sure clients are content with the quality of its cars, said Benedicte Mougeot, fund manager of HSBC GIF Japanese equity fund in Hong Kong. The company's forecast earnings and profitability will surely decrease because of the recall. Taking into account the increased risk and reduced profitability, we will review our investment.

Toyota's new forecast for the year to March compares with a 38 billion yen annual loss forecast in a survey of 19 brokerages by Thomson Reuters I/B/E/S.

Toyota posted October-December operating profit of 189 billion yen, easily beating a 99 billion yen estimated by Thomson Reuters I/B/E/S. It was its strongest profit in six quarters.

SALES, SHARES HIT

Investors have now turned their focus on how long and far the damage would go, with Toyota's sales in its most important U.S. market already falling 16 percent in January -- enough to knock it to third place, below Ford Motor Co.

Two congressional committees plan hearings this month on the Toyota recalls.

I am in no way certain that Toyota's explanation for the cause of incidents of sudden acceleration in its vehicles satisfies me, John Dingell, a Michigan Democrat and longtime ally of the U.S. auto industry, said on Wednesday.

The developments underscored the increasingly political overtones of a safety crisis that has hit Toyota sales, and rocked confidence in a brand built on its reputation for quality.

Shares in Toyota have lost as much as 23 percent or some $30 billion in the last two weeks since and slid to a 10-month closing low on Thursday.

(Additional reporting by Bernie Woodall, Kevin Krolicki, Yumiko Nishitani and David Dolan; Writing by Lincoln Feast; Editing by Jean Yoon)

Toyota Safety Recall