UPDATE 5-Int'l Paper beats Street, but Q4 to trail Q3

* IP's revenue falls 13 percent

* $320 mln alternative fuel credit helped boost results

* Debt cut by $1.3 bln

* 4th qtr earns seen 'significantly lower' than Q3

* Shares fall 3.8 percent (Adds executive comment. Updates stock movement.)

By Ernest Scheyder

NEW YORK, Oct 28 (Reuters) - International Paper Co (IP.N) reported an adjusted third-quarter profit on Wednesday that easily beat Wall Street's expectations, but it said fourth-quarter results would be "significantly lower" than the third quarter's.

Executives cited seasonally weak demand in the fourth quarter for the outlook and stressed that results were slowly improving from last year.

The outlook "shouldn't be news to anyone," Chief Financial Officer Tim Nicholls told Reuters. "Our investors know our business and our industry very well, and know that the fourth quarter is weak."

That did not seem to assuage Wall Street, where shares were off 2.9 percent to $21.99 in afternoon trading.

The stock had jumped as much as 3 percent earlier in the session.

Demand for IP's packaging and paper products had waned during the past year due to anemic sales of basic consumer goods and construction materials, but the company stressed that results should steadily improve from a year before.

"We expanded margins year over year and continued to deliver strong cash flow and pay down debt, and I'm confident we're in position to benefit as the economy continues to slowly recover," Chief Executive John Faraci said in a release.

Costs were 27 percent lower in the period.

Net income rose to $371 million, or 87 cents per share, from $149 million, or 35 cents per share, in the year-earlier period.

The Memphis, Tennessee-based company's results were boosted by an alternative fuel credit originally intended for the transportation sector.

Excluding the $320 million alternative fuel credit, restructuring charges and other one-time items, the company posted earnings of 37 cents per share.

By that measure, analysts had expected earnings of 24 cents per share, according to Thomson Reuters I/B/E/S estimates.

Sales fell 13 percent to $5.92 billion, but beat the $5.89 billion analysts had expected.

By mixing diesel with biomass, which the company already uses to produce power, IP secured a $320 million credit.

"That's a phenomenal amount of money," RBC Capital Markets analyst Paul Quinn said. "It just blows me away that companies can get this kind of (credit), but that's what it is."

Ironically, federal stipulations required the use of diesel to get the credit. Previously, IP had not mixed the fuel with its biomass to produce power.

The alternative fuel credit is set to expire at year's end, and the company is seeking a replacement.

Pulp and paper producers likely do not qualify for cellulosic ethanol tax credits, though the U.S. Department of Agriculture's Biomass Crop Assistance Program, which credits companies that supply biomass conversion facilities, might be an option, executives said.

A 'VERY IMPRESSIVE QUARTER'

Longbow Research analyst Joshua Zaret praised the company's modest jump in demand, lower costs and fewer maintenance outages during the third period.

"For the results they produced in this very weak economy, it was very good," he said. "It was a very impressive quarter relative to expectations."

IP also doubled its debt repayment during the period, cutting $1.3 billion from its balance sheet. That move was likely helped by the alternative fuel credit, RBC Capital Markets' Quinn said. (Reporting by Ernest Scheyder; Editing by Gerald E. McCormick and Maureen Bavdek)