SAN FRANCISCO (Reuters) - Google Inc reported a weaker-than-expected 35 percent rise in quarterly net profit due to lower interest income and higher expenses for foreign currency hedges, driving its shares down 7 percent on Thursday.

While other Internet companies have been suffering from a weakening U.S. economy, Wall Street has come to count on Google to deliver positive revenue and earnings surprises over and above consensus expectations each quarter.

"It's hard to love the numbers," said Colin Gillis, analyst at Canaccord Adams. "There's the initial shock of this being the best company in the space and it just fell short."

Net income for the second quarter rose to $1.25 billion (624 million pounds), or $3.92 per diluted share, from the year-earlier quarter's $925 million, or $2.93 per diluted share.

Excluding stock-based compensation costs, profit was $4.63 per share, below the $4.72 average of Wall Street analyst forecasts, according to Reuters Estimates.

Gross revenue rose 39 percent to $5.37 billion, matching the average of analyst estimates ranging from $5.16 billion to $5.62 billion.

Google shares fell as much as 10 percent from a Nasdaq close of $533.44. The stock recovered to around $497 after Chief Executive Eric Schmidt said on a conference call that traffic and revenue have held up well despite uncertain economic conditions.

Executives said the earnings miss was unrelated to its online advertising business or the health of the economy. Instead it was various financial manoeuvres the company took to manage its cash during the quarter that caused a sharp drop in what it calls "other income and expenses" to $57.9 million from $137.1 million a year ago.

Chief Financial Officer George Reyes cited lower yields on cash holdings as it braced for higher interest rates, and the costs of acquiring advertising technology company DoubleClick.