UPDATE 2-DiamondRock FFO tops Street, shrs fall on RevPAR

* Q3 adj FFO $0.19 vs est $0.17

* RevPAR down 17 pct at $107.5

* Shares down about 4.5 pct

(Adds analyst comments, updates share movement)

Oct 20 (Reuters) - Diamondrock Hospitality Co (DRH.N), which acquires and invests in hotel properties, posted third-quarter funds from operations that beat market expectations, but its shares fell due to continued declines in occupancy rates and revenue per room.

Revenue per available room (RevPAR), a standard gauge of health in the hotel industry, decreased 17 percent to $107.50 from $129.33 during the quarter.

Janney Montgomery Scott analyst Daniel Donlan, however, said DiamondRock reported the lowest hotel-level decline in RevPAR and EBITDA margin from among the hotel REITS that have reported so far in the third quarter of 2009.

Last week, Host Hotels & Resorts (HST.N) reported a 21.3 percent drop in its RevPAR for the third quarter.

Donlan said he does not expect RevPAR for the industry to turn positive before the second half of 2010, and added that he does not expect DiamondRock's operating margin to turn positive until the fourth quarter of next year.

"It seems the year-over-year decline in occupancy is moderating, but the average daily room rate is still bottoming," said Donlan by phone. Occupancy fell 3.2 percent, while average daily room rate was down 13.2 percent.

The company expects to pay dividend ranging between $35 million and $45 million on Dec. 31, of which up to 90 percent would be paid through common stock.

Earlier this year, DiamondRock, which had plans to sell 11 of its properties to pay down debt, took them off the market due to a murky pricing environment.

For the third quarter, the company reported adjusted funds from operations at $21 million, or 19 cents a share, compared with $31.8 million , or 34 cents a share, a year ago.

Analysts on average were expecting the company to post funds from operations per share of 17 cents, according to Thomson Reuters I/B/E/S.

The quarterly numbers were helped by cost-cutting efforts and stabilizing demand at the company's hotels.

DiamondRock expects lodging demand to lag the general economic recovery by several quarters, it said.

Business travel, traditionally one of the most lucrative segments for hotels, would dictate fourth quarter results, the company said.

Shares of the company were trading down more than 4 percent at $8.34 in afternoon trade Tuesday on the New York Stock Exchange. They have risen 45 percent in the last six months. (Reporting by Fareha Khan in Bangalore; Editing by Vikram S Subhedar and Saumyadeb Chakrabarty)