UPDATE 2-AvalonBay 3rd-quarter FFO fell 11 percent

* Q3 FFO shr $1.09 vs. $1.08 expected

* Sees 2009 FFO shr $3.86 to $3.90 (Adds detail on outlook)

NEW YORK Oct 28 (Reuters) - AvalonBay Communities Inc (AVB.N), an owner and builder of apartments, posted lower third-quarter funds from operations on Wednesday, as rental revenue fell in all of its regions while expenses mostly rose.

Quarterly FFO fell to $87.7 million, or $1.09 per share, from $99 million, or $1.28 per share, a year earlier. The result was a penny better than analysts' average forecast of FFO of $1.08 per share, according to Thomson Reuters I/B/E/S.

FFO is a key performance measure for real estate investment trusts, or REITs, because it excludes the profit-reducing effect of depreciation.

In its key Metro New York and New Jersey region, rental revenue fell 5.7 percent while operating expenses jumped 4 percent from a year earlier.

Alexandria, Virginia-based AvalonBay cut its previously lowered 2009 FFO forecast to a range of $3.86 to $3.90 per share from $4.15 to $4.30, to reflect a loss related to a debt repurchase. Analysts were looking for 2009 FFO of $4.19 per share.

AvalonBay said rents and occupancy were lower, while operating costs rose in the quarter. As a result, its net operating income (NOI) for communities operating at least a year fell 8.5 percent to $98.9 million.

It posted the steepest declines in NOI in its California markets, which together account for 30 percent of total company NOI.

Shares of the company, which reported after the closing bell, closed down 4 percent at $69.78. (Reporting by Nick Zieminski and Ilaina Jonas)