* 3rd straight month-on-month rise

* Good Q2 outlook; eyes on demand from U.S., Europe markets

* Stock falls 5 pct before results, lagging big board

(Recasts with comments and graphics)

By Baker Li

TAIPEI, June 9 (Reuters) - May sales at UMC (2303.TW), the world's No.2 contract chip maker, fell from a year ago but marked its third straight month-on-month rise, the latest evidence of recovering demand for the company's technology products.

After a slow first quarter, UMC and sector leader TSMC (2330.TW) (TSM.N) have forecast a brighter second quarter as demand for PCs and other consumer gadgets picked up, especially from China as a result of stimulus spending on the mainland.

However, analysts say any significant recovery in the U.S. or Europe remains to be seen and that could affect the growth momentum of their sales into the second half of the year.

United Microelectronics Corp (UMC) (UMC.N), which counts U.S. Texas Instruments (TI) (TXN.N) as one of its major clients, garnered sales of T$7.514 billion ($228 million) last month, down 12.7 percent from a year ago but up 9.3 percent from April.

On Monday, TI raised its targets for second-quarter earnings and revenue, showing improving demand in the chip market. [ID:nN08327409]

UMC released the sales results after the Taipei stock market closed on Tuesday. UMC shares slid 4.98 percent, larger than a 3.22 percent drop on the main TAIEX . Shares of TSMC, whose May sales are due out on Wednesday, fell 0.88 percent.

"Most investors have priced in the better outlook for the second quarter," said Kenneth Lee, vice president of the research department of Taiwan's Fubon Securities Investment Services.

"We all know the China market is still growing but we won't see a broader recovery until after we see a pickup from the U.S. and Europe."

For 2009, the chip foundry market would underperform the overall semiconductor industry, suffering a revenue decline of 26.5 percent, according to market research firm iSuppli Corp. [ID:nTP108481]

In the first five months of the year, UMC's sales amounted to T$25.23 billion, down 39 percent from a year ago, the company said in a statement, without giving an explanation.

For a graphic on UMC's monthly sales, click here (US$1=T$32.9) (Editing by Ken Wills)