UPDATE 2-China's Alibaba profit hit as it bets on expansion

* Q3 net profit down 20 pct, worst in 3 quarters

* Sees very limited growth potential from Q4 to Q1 2010

* Operating expenses shoot up 61 percent

* Paying membership base grows 45 percent

* Alibaba shares end up 3.5 percent before results (Adds details, CEO and analyst quotes)

By Melanie Lee

SHANGHAI, Nov 10 (Reuters) - Alibaba.com (1688.HK), China's largest e-commerce company, reported its worst profit in three quarters after betting on acquisitions and product development to tap the region's early recovery from the global downturn.

The company, Yahoo's (YHOO.O) business partner in China, sees limited growth potential from this year's fourth quarter to the beginning of next year and is looking for more partnerships in the United States to expand its business.

Despite the weak profit, the growth campaign is helping to drive up the company's user base.

"From these numbers it looks like fourth quarter will be strong," said Patrick Yau an analyst with Macquarie Research.

"The membership base is growing nicely both in the domestic marketplace and the international marketplace and growth is picking up rather than slowing down," he said.

Alibaba.com, the listed unit of Alibaba Group, in which Yahoo holds a nearly 40 percent stake, reported a 20 percent decline in its third-quarter profit to 236 million yuan ($35 million).

That was roughly in line with the average forecast for a profit of 222 million yuan, according to two analysts polled by Thomson Reuters I/B/E/S. The profit was driven down by total operating expenses that shot up 61 percent to 669 million yuan in the third quarter.

"As we enter recovery, we see a stronger economic environment in Q4 and we remain cautiously optimistic for next year to remain relatively flat," Alibaba CEO David Wei said in a statement.

He said on a conference call the company will see a strong recovery in the fourth quarter due to restocking and increased demand for Chinese exports as the global economy starts to recover, but that such growth may not continue at such a high rate into next year's first quarter.

Alibaba.com's shares have more than tripled this year on hopes that China's economy would help pull the region out of recession on the back of a 4 trillion yuan stimulus spending plan by Beijing, which has encouraged more spending through easy credit and other incentives.