** Shares of Australia's Woolworths WOW.AX gain 1.9% to A$28.28; set for strongest trading session since February 26

** Analysts at Macquarie upgrade rating on the supermarket giant to "Out-perform" from "Neutral", keep PT at A$30.8

** Brokerage sees potential for a re-rating as market becomes comfortable with risks around the inquiry into supermarkets by the local competition watchdog

** Sees non-zero risks of severe measures being recommended against WOW due to the inquire

** Macquarie sees upside risk on an earnings recovery for WOW as group reviews its segments and seeks to leverage strong assets and scale

** Says WOW is trading at around five-year lows, compared to smaller peer Coles COL.AX and sees this as an opportunity to buy the stock

** Brokerage, however still prefers Coles in the sector; COL trading 0.4% higher

** WOW down 7.5% YTD

(Reporting by Rishav Chatterjee in Bengaluru)

((Rishav.Chatterjee@thomsonreuters.com;))