UPDATE 3-International Paper profit tops Wall St view

* Q2 EPS ex-items 20 cents tops Wall St view of 2 cts

* Sales flat at $5.8 billion

* Shares rise 2.7 pct (Adds background, CEO comment, updates shares)

By Matt Daily

NEW YORK, July 30 (Reuters) - International Paper Co (IP.N) posted higher-than-expected second-quarter earnings on Thursday helped by lower costs and the benefits from an acquisition, and its shares rose more than 5 percent.

Paper and packaging makers have scrambled to scale back operations and close plants because of sagging demand amid the weakest economic conditions in decades.

International Paper, which has cut 8,000 jobs in the last year, or 12 percent of its workforce, has also been slashing costs to pay down debt from the $6 billion purchase of Weyerhaeuser Co's (WY.N) packaging operations last year.

That acquisition has appeared to pay off, since most analysts had expected the company to barely break even this quarter.

"What was surprising was the strength of the industrial packaging business," said Longbow Research analyst Joshua Zaret. "They generated an 11.2 percent margin, and we haven't seen that for a while."

Still, the company said it did not expect a rebound in either the economy or earnings in the near term.

"We don't have perfect clarity on what's ahead. We are still in a global recession, and we expect third-quarter earnings to remain to be about the same as they were in the second quarter," Chief Executive Officer John Faraci told a conference call.

Net earnings fell 40 percent to $136 million, or 32 cents per share, from $227 million, or 54 cents per share, a year earlier.

Excluding items, earnings from continuing operations were 20 cents per share, easily beating the 2 cents that analysts had on average forecast, according to Reuters Estimates.

Net sales were flat at $5.8 billion.

The company said it had reduced input and freight costs by $77 million from the first quarter of the year, or about 12 cents per share.

The industrial packaging unit posted operating profit of $255 million, up from $188 million in the first quarter.

International Paper also reported a $294 million extraordinary gain from federal tax credits for using alternative fuels.

The tax break, intended to encourage the use of biofuels, has been a big help to paper makers that generally burn a biofuel called "black liquor" in power mills. It is a byproduct obtained while processing wood to get pulp for making paper.

Shares of International Paper climbed as much as 6.4 percent in early trade before easing to 18.89 per share, up 2.7 percent in early afternoon trading on the New York Stock Exchange. (Reporting by Matt Daily; editing by Jeffrey Benkoe, Lisa Von Ahn and Gunna Dickson)