UPDATE 1-Activision posts better-than-expected earnings

* Shares rise 10.6 pct after 7.4 pct drop during day

* Sets $1 billion share buyback

* Affirms full year outlook for revenue, operating income

NEW YORK, Nov 5 (Reuters) - Video game publisher Activision Blizzard Inc (ATVI.O) posted better-than-expected third quarter earnings on Wednesday, fueled by sales of "Guitar Hero: On Tour", and said it plans to buy back $1 billion of its stock.

Activision affirmed its full year outlook of $4.9 billion in revenues and $1.2 billion in operating income, and its shares climbed more than 10 percent after-hours.

Excluding special items, the company reported a profit of 7 cents a share, beating Wall Street estimates of 5 cents a share, according to Reuters Estimates.

The results were Activision's first since it closed its merger with Blizzard, the games unit of France's Vivendi SA, which makes the "World of Warcraft" game.

On a net basis the company reported a loss of $108 million, or 8 cents a share, versus a profit of $48 million, or 8 cents a share, one year ago.

Activision goes head-to-head with Electronic Arts Inc (ERTS.O) in the battle for the title of biggest video game publisher.

On a conference call with analysts, Chief Executive Bobby Kotick said that its holiday line of games "seems to be the strongest in our industry."

However, he noted that "we remain cautious given the likely slowdown in consumer spending this holiday season."

Shares of Activision rose to $12.14 from a Nasdaq close of $10.98. (Reporting by Franklin Paul; editing by Carol Bishopric)