UPDATE 3-Invesco quarterly profit surges on stocks, merger

* Adjusted EPS 44 cents vs Street view 40 cents

* Assets under management up 34 pct to $617 billion

* Q4 net outflows $17 billion

* Lost one index-based account of $18.6 billion in Q4

* Shares up 2 percent (Adds CEO comment, stock price update)

BOSTON, Jan 27 (Reuters) - Invesco Ltd (IVZ.N), one of the largest U.S. mutual fund companies, reported a higher-than-expected quarterly profit as it benefited from a big acquisition and increases in global stock markets.

Still, Invesco Chief Executive Martin Flanagan told analysts on Thursday that he saw a challenging market for equity mutual fund sales.

So far in January, "people are starting to move cautiously into equities and U.S. equities in particular," Flanagan said. "It's not a big run towards them yet."

Net outflows in the fourth quarter totaled $17 billion because of the previously disclosed loss of a single $18.6 billion indexed equity account from one client.

Even excluding the one major loss, net inflows to long-term funds of $1.6 billion were down from $4.9 billion in the third quarter. Investors added $4.4 billion to bond funds, $2.2 billion to alternatives and $600 million to balanced funds. Stock funds lost a net $5.6 billion from customers even excluding the big withdrawal.

Rising markets boosted total assets by $24.2 billion. Invesco acquired Morgan Stanley's (MS.N) $115 billion retail fund unit in June for $1.5 billion, in time to benefit from the stock market's fourth-quarter surge.

Assets under management totaled $616.5 billion at the end of 2010, up 34 percent from a year earlier.

Shares of Invesco were up 2 percent at $24.25 in morning trading.

Earnings, excluding certain items, rose to $209.3 million, or 44 cents per share, in the fourth quarter from $130.7 million, or 30 cents per share, a year earlier. Analysts were expecting 40 cents a share, according to Thomson Reuters I/B/E/S.

Analysts and investors focus on Invesco's profit before items such as merger expenses and consolidated revenues and expenses from certain investments.

Under generally accepted accounting principles, the company had fourth-quarter net income attributable to common shareholders of $175.2 million, or 37 cents a share, compared with $110.9 million, or 25 cents a share, a year earlier.

Invesco's acquisition from Morgan Stanley included the Van Kampen line of mutual funds. During the fourth quarter, Invesco acquired $5.4 billion of alternative assets from AIG Global Real Estate Investment Corp.

At Wednesday's close, Invesco stock had gained 6 percent over the past three months, trailing the Standard & Poor's 500 index's .SPX 9 percent increase. (Reporting by Aaron Pressman; editing by John Wallace and Lisa Von Ahn)