UPDATE 1-Caterpillar profit weakened by high inventory, China fraud

* Fourth-quarter EPS falls 55 percent to $1.04

* Revenue dips 7 percent to $16.08 bln; misses Street

* Inventory down from third quarter, but up from last year

* Forecasts 2013 profit in range below Street

Jan 28 (Reuters) - Caterpillar Inc, the world's largest maker of construction equipment, posted a 55 percent drop in quarterly profit on Monday due to a charge connected with accounting fraud at a Chinese subsidiary and weak demand among its dealers.

Caterpillar's bulldozers, tractors and other machines have been accumulating in warehouses due to slowing economies in China, Europe and the United States.

The company said it was able to sell off some of this glut in the fourth quarter, reducing the value of its inventory from the third quarter by $2 billion. Levels, however, remain $1 billion above year-ago levels, and executives forecast 2013 would be a "tough year."

Caterpillar said earlier this month it discovered accounting fraud at a Chinese coal mining supplier it bought in 2012. Caterpillar wrote down most of the $650 million deal, zapping fourth-quarter results by 87 cents per share.

"We're encouraged by recent improvements in economic indicators, but remain cautious," Caterpillar Chief Executive Doug Oberhelman said in a statement on Monday.

For the fourth quarter, the company posted net income of $697 million, or $1.04 per share, compared with $1.55 billion, or $2.32 per share, in the year-ago quarter.

Revenue fell 7 percent to $16.08 billion. Analysts expected revenue of $16.12 billion, according to Thomson Reuters I/B/E/S.

Caterpillar expects to earn $7 to $9 per share in 2013, below the $9.12 per share analysts expect.