Smartphone market growth slows in Q3-Canalys

* Q3 sales up 4 pct y/y vs 13 pct in Q2

* Sees cheaper models boosting growth in next 2 years

* Microsoft share drops to 8.8 pct vs 13.6 pct yr ago

* Google Android has 3.5 pct of market in Q3

HELSINKI, Nov 3 (Reuters) - Growth in the global smartphone market slowed to 4 percent in the July-to-September quarter as sales of more advanced handsets fell in Europe and Latin America, research firm Canalys said on Tuesday.

“While growth has undoubtedly slowed, it is still outperforming the overall mobile phone market by some margin, as well as driving data revenue for operators,” Canalys analyst Pete Cunningham said in a statement.

The overall mobile phone market fell 4-6 percent in July-September, according to analysts estimates.

Canalys said much of the recent growth in the smartphone market has come from the most expensive models -- iPhone, Nokia’s N97 and the BlackBerry Bold -- but vendors are increasingly focusing on offering cheaper models.

“We expect this to boost growth and penetration of smartphones substantially over the next two years. There will be increasing competition in this space,” said Canalys’ Rachel Lashford.

Market leader Nokia NOK1V.HE lost some share in the quarter but still held 40 percent of the smartphone market, well ahead of Research in Motion's RIM.TORIMM.O 21 perent and Apple's AAPL.O 18 percent, Canalys said. Taiwan's HTC 2498.TW was a distant fourth with 5 percent, ahead of Fujitsu on 3 percent.

Among operating systems, Microsoft's MSFT.O Windows Mobile continued to lose share and held 8.8 percent in the third quarter, while newcomer Google's GOOG.O Android had 3.5 percent.

Both are still far behind Symbian’s 46 percent. (Reporting by Tarmo Virki; Editing by David Cowell)