UPDATE 3-Tellabs outlook misses Street, shares fall 12 pct

* Q3 rev $429 mln vs Wall St view $427 mln

* Sees Q4 revenue $410-430 mln vs Street view $442 mln

* Q4 margin outlook also disappoints

* Shares down 13 pct (Updates share move, market share, stock buyback)

NEW YORK, Oct 26 (Reuters) - Communications equipment maker Tellabs Inc TLAB.O gave a weaker-than-expected outlook, confirming fears AT&T Inc T.N was turning to rivals like Cisco Systems Inc CSCO.O and Alcatel-Lucent ALUA.PA, and sending its shares down 13 percent.

Tellabs forecast $410 million to $430 million in revenue for the fourth quarter, missing Wall Street’s average forecast of $442 million.

In the past year, the company benefited from a push by phone companies like AT&T to build advanced wireless networks to support smartphones and other new devices. But it now faces tough competition from rivals and hard bargaining by carriers.

Its gross margin outlook of 44 percent for the current quarter also disappointed analysts, many of whom had expected it to stay above 50 percent. It was 50.2 percent in the third quarter.

“We’ve been seeing a rapid decline in its legacy products, and now growth products seem to have hit an air pocket,” said Morgan Keegan analyst Simon Leopold, who had downgraded the shares to “market perform” last month on worries AT&T and others may not buy as much equipment from Tellabs as the market expected.

“Our expectation had been that Tellabs could have a challenging 2011, and it looks that way,” he said.

Analysts have long been speculating that Tellabs may be losing market share as AT&T upgrades their networks using equipment from competitors like Cisco. Some said the shift may be happening more quickly than they expected.

The company confirmed it was losing market share in broadband data equipment in North America. It expects slower sales of cross connect equipment, which are systems that connect voice and data signals with high-speed networks.

AT&T and Verizon Communications Inc VZ.N account for around half of the company's total revenue.

Tellabs shares were down $1.03 at $7.03. They had risen around 5 percent in the past three months prior to the results.

Third-quarter revenue rose to $429 million from $389 million, mostly in line with the market’s expectations.

Its quarterly profit rose to $59 million from $28 million a year earlier. Earnings per share, excluding intangible asset amortization but including stock option expenses, was 16 cents compared to the market’s forecast of 14 cents, according to Thomson Reuters I/B/E/S.

Tellabs repurchased around 15.6 million shares in the third quarter at a cost of $111 million. (Reporting by Ritsuko Ando; Editing by Dave Zimmerman and Derek Caney)