UPDATE 3-Amazon disappoints with ho-hum quarter, shares fall

* Q2 EPS 32 cents vs Street view for 31 cents

* Q2 revenue up 14 percent, shy of Street view

* Sees Q3 revenue of $4.75 billion to $5.25 billion

* Shares slide 6.6 pct after closing up nearly 6 pct (Adds analyst's quote, details from conference call, Zappos, background)

By Alexandria Sage

SAN FRANCISCO, July 23 (Reuters) - Amazon.com Inc (AMZN.O) posted a 10 percent decline in second-quarter earnings and gave a modest third-quarter outlook on Thursday, taking the shine off the world's largest online retailer and sending its shares down nearly 7 percent.

Amazon, fresh from announcing that it would buy booming online shoe store Zappos.com for $928 million, also reported slimmer operating margins, hit by a one-time litigation charge for a settlement with Toysrus.com.

Investors have come to depend on Amazon to outpace a soft e-commerce arena by capturing market share and launching new categories of goods, defying cutbacks in consumer spending that have hammered retailers from Wal-Mart (WMT.N) to eBay (EBAY.O).

But the modest results and strained margins caused by the litigation charge and foreign currency exchange rates, took some of the luster off the dominant player in the online retail world, especially with many investors already viewing its stock as overvalued.

Bernstein Research analyst Jeffrey Lindsay said a "spectacular unprecedented performance" in the quarter would have been needed to justify the recent run-up in shares.

Stock in Amazon is up 80-plus percent since the start of 2009, well in advance of the Nasdaq and outpacing main rival eBay.

"Amazon had run up a lot because it was the only real growth story left and everyone was buying in on it for the last couple of months on pure momentum. It's one of the biggest overshoots we've seen in recent years," Lindsay said.

"It's a wake-up call that the pricing has become unrealistic," he said.

DOWNTURN "NOT OVER YET"

Amazon reported second-quarter net profit of $142 million or 32 cents per share, compared with $158 million or 37 cents per share a year ago. That was a penny above the 31 cents expected on average by analysts, according to Reuters Estimates.

Operating margins stood at 3.4 percent in the quarter, below the 5 percent seen in the first quarter.