UPDATE 4-Tellabs shares fall on AT&T fears, but results beat

* CEO says demand from AT&T good but sees competition

* Tellabs shares fall 7 pct

* Tellabs Q2 EPS excl items $0.16 beats Street’s $0.13

* Q2 rev $423 mln vs Wall St view $422 mln

* Sees Q3 rev $425 mln-435 mln vs Street’s $416 (Rewrites with share fall, adds comments from analyst)

By Ritsuko Ando

NEW YORK, July 27 (Reuters) - Fears that Tellabs Inc TLAB.O may lose some business with top customer AT&T Inc T.N to a rival sent the company's shares down 7 percent on Tuesday, despite its stronger-than-expected results and outlook.

The communications equipment maker said it was benefiting from a push by phone companies to upgrade wireless networks that support smartphones and other new devices, but cited tough competition among vendors.

“I want to address this issue head-on ... We do know AT&T is trialing a third vendor in its mobile networks. At the same time, Tellabs sees good demand from AT&T,” Chief Executive Rob Pullen told analysts on a conference call.

AT&T had chosen Tellabs and another vendor to help build its LTE high-speed wireless network, but it recently added one more rival to the mix, Pullen said. Some analysts have said AT&T may opt to buy more equipment from Cisco Systems Inc CSCO.O rather than Tellabs in the future.

While an improving economy and increasing traffic from new gadgets like Apple Inc's AAPL.O iPhone are encouraging carriers like AT&T to spend more on their wireless networks, they are also seen driving a hard bargain with vendors.

“We would expect this to be competitive going forward,” said Pullen.

Tellabs shares fell 56 cents to $7.23 in morning Nasdaq trading. They had initially risen in early trade on the stronger-than-expected results and outlook.

The company said its second-quarter net profit rose to $64 million from $16 million a year earlier.

Profit per share, including stock-based compensation but excluding other charges, was 16 cents, beating the average Wall Street forecast of 13 cents a share, according to Thomson Reuters I/B/E/S.

Morgan Keegan & Co analyst Simon Leopold said he was somewhat surprised by the steep fall in the shares.

“The industry is a competitive one. This is a reminder, but that’s not new,” he said.

“The Q3 outlook was better than we expected. We thought revenue would be sequentially lower and they forecast some improvement.”

Quarterly revenue rose 10 percent from a year ago to $423 million, Tellabs said. Advanced IP (Internet protocol) and Ethernet technologies accounted for 58 percent of revenue.

It also forecast revenue in the third quarter in a range of $425 million to $435 million. Wall Street had forecast second-quarter revenue of $422 million, and third-quarter revenue of $416 million. (Reporting by Ritsuko Ando, editing by Dave Zimmerman and Maureen Bavdek)