UPDATE 1-SL Green second-quarter FFO falls 28 pct

* Q2 FFO $1.20 meets Wall Streets forecast

* Manhattan occupancy holds

* Net operating income rises 2.1 percent

* Shares close at $23.80 before earnings release

NEW YORK, July 27 (Reuters) SL Green Realty Corp (SLG.N), midtown Manhattan's largest office landlord, said funds from operations fell 28.6 percent, in part on greater loan loss reserves, higher real estate taxes and weaker rent rate power, especially at its suburban office properties.

The company, which owns property chiefly in Manhattan and its suburbs, on Monday posted funds from operations (FFO) of $83.5 million, or $1.20 per share, down from $117 million or $1.92 per share in the year-earlier quarter.

FFO of $1.20 per share was also the average of analysts forecasts, according to Reuters Estimates.

The results included a gain of $30.2 million for the early extinguishment of debt.

FFO, a performance measure, removes the profit-reducing effect of depreciation, a noncash accounting item.

The Manhattan market has been rocked by the crumbling financial industry, pushing the second-quarter vacancy rate up to a 4.5-year high.

During the quarter, SL Green leased 328,780 square feet of Manhattan office space. At $51.10 per square foot, the average starting rent of new leases was 27.3 percent higher than that of leases that expired. The average term of a lease was 10.9 years with four months of free rent and tenant improvements of $53.68 per square foot.

Last year, in a much stronger market, the average rent on new leases for Manhattan office space was 53.5 percent higher than expiring leases.

At the end of the quarter, the company's Manhattan portfolio of office buildings was 96.2 percent occupied, off slightly from the 96.7 in the year-early quarter.

Rent at SL Green's suburban offices was $31.34 per square foot, about 0.8 percent over expiring lease. Occupancy slipped to 90.3 percent from 91.8 percent the prior year.

For offices the company has operated for more than a year, net operating income rose 2.1 percent in the quarter, compared with a jump of 8.9 percent in the year-ago quarter.

The company's structured finance investments totaled $534.5 million at June 30, a decrease of $145.3 million from the balance at the end of 2008.

During the second quarter, the company sold $96.8 million of structured finance investments, generating $58.5 million in net proceeds. But it also recorded $45.6 million in additional loan loss reserves.

SL Green shares closed at $23.80, up 1.23 percent, or 29 cents, on the New York Stock Exchange before the earnings results were released. (Reporting by Ilaina Jonas; Editing by Phil Berlowitz)