UPDATE 3-Norway buys $1 bln of Paris property from AXA

* Deal is fund's 2nd property buy after Regent St. in London

* AXA says deal will help it expand in Europe

* Fund looking to Germany next, eyeing 4-5 biggest cities

(Adds quotes, analyst)

By James Regan and Gwladys Fouche

PARIS/OSLO, July 5 (Reuters) - Norway's $584 billion sovereign wealth fund said it was spending $1 billion buying prime Paris property from French insurer AXA and is eyeing real estate in Germany next.

The sovereign wealth fund, known locally as the oil fund because it invests oil and gas revenue for future Norwegians, said on Tuesday it would pay 702.5 million euros ($1 billion) for 50 percent of seven properties in and around Paris.

The properties boast 156,000 square metres of largely office space in the western and central business districts of the French capital, including the prestigious Champs-Elysees area.

Addresses include 12-14 Rond Point des Champs-Elysees and 16 Avenue Matignon, a stone's throw from the Elysee Palace, where French President Nicolas Sarkozy lives.

Competition for top-tier assets is fierce in the Paris office market, as in London, with global investors chasing deals that promise solid rental income and valuation gains.

Some investors say such competition has already over-inflated prices. The property arm of insurer Standard Life said last month it was hard to see value in Paris offices at yields of less than 5 percent.

"(The deal) is an illustration of the pragmatic behaviour some investors are using in the market now," said Magali Marton, an analyst at global property consultancy CB Richard Ellis.

"(They are) looking for the same kind of prime property in the central business district or very mature office districts," she said, adding that the bought properties were the most prestigious in AXA Real Estate's portfolio.

Marton said the offices in the portfolio would likely have an average rental yield of about 5-5.5 percent.

"The investment is in line with our strategy to initially invest in the biggest European property markets before expanding into other regions," Karsten Kallevig, chief investment officer for real estate at the fund, said in a statement.

The fund and AXA will also form a joint venture in which AXA's real estate arms will provide asset management services.

"The joint venture will allow AXA to reallocate capital and diversify into other European markets, especially the UK and Germany," Pierre Vaquier, chief executive of AXA real estate, said in a statement.

NEXT MOVE

Kallevig told Reuters Norway's fund would look to make real estate investments in Germany next. "If you mentioned the largest four or five cities in Germany, then that's probably where we would start looking," he said in an interview.

Last year in its first-ever property deal, the fund agreed to buy a 25 percent stake in the UK Crown Estate's Regent Street properties in central London for 448 million pounds ($719 million).

Also last year Norway's Ministry of Finance permitted the fund to invest up to 5 percent of its assets -- or $29 billion today --in real estate by shifting investment from bonds.

The fund previously said it would probably take some four to eight years for its real estate portfolio to reach the planned level of 5 percent of the fund's overall investments.

(Additional reporting by Andrew Macdonald in London, with Victoria Klesty and Walter Gibbs in Oslo; Editing by David Holmes and Elaine Hardcastle)