* $500 bln fund earns 7.2 pct return on investment in Q3
* Says capital flow curbs across globe a major risk
* Launches real estate investment with $719 mln London buy
* Says invested most of Q3 inflows into U.S. assets
* Bought Spain bonds early in Q3, steady on other euro bonds
By Wojciech Moskwa and Camilla Knudsen
OSLO, Nov 4 (Reuters) - Norway's sovereign wealth fund (SWF) earned $34 billion on its investments in the third quarter as markets rallied and warned of risks stemming from potential capital flow restrictions in reaction to global imbalances.
The $500-billion-plus SWF, the world's second largest behind its peer in the United Arab Emirates, also picked a prime central London retail site for its first ever real estate purchase in a $719 million deal.
The fund's chief executive Yngve Slyngstad told Reuters that continued imbalances in the global economy were behind a change in sentiment towards limiting the free flow of capital -- which he said was a major risk for global investors and wealth funds.
"If you look at the risk spectrum of a fund of our size... the potential for restrictions for capital flows is very high on the radar," Slyngstad said in an interview.
Slyngstad declined to comment directly on the U.S. Federal Reserve's decision to extend its quantitative easing, which has triggered calls for capital curbs in emerging economies fearful of inflows that would boost their currencies. [ID:nTOE6A300V]
"World imbalances seem not to go away, they are still with us and consequences are starting to appear, also in the countries (that) are looking on how they can potentially control these capital flows," Slyngstad said.
He said that using words such as "trade or currency war" were too strong but that there has been a significant change in the approach to restricting capital flows in past months.
Slyngstad said the fund was a big buyer of Spanish debt early in the third quarter, while its other euro bond holdings remained largely unchanged over July-September.
The bulk of new inflows to the fund over the third quarter, however, were invested in U.S. assets, partly as a result of the U.S. dollar's weakening against the euro.
"To some extent it's a function of the euro-dollar movement. We quite often go against the movements, so if something is falling we tend to buy and if something is rising we tend to sell," Slyngstad told Reuters.
In line with preliminary data, the value of the central bank-run fund stood at 2.91 trillion Norwegian crowns ($503.5 billion) on Sept. 30, up from 2.79 trillion at end-June. The fund has since topped 3 trillion crowns, Norway has said.
The third-quarter return on investment stood at 7.2 percent, about 0.4 percent above the fund's benchmark portfolio. About 60.4 percent of the fund was allocated in stocks, against 59.6 percent at the end of the second quarter.
Slyngstad said that strong corporate earnings and reduced fears of an economic slowdown in Europe contributed to the third quarter stock market rally that boosted the fund's value.
"Concern over some southern European countries' sovereign debt also eased somewhat," Slyngstad said.
About 70 percent of the new capital inflows to the fund, which is fed by Norwegian tax revenues from oil and gas operations, went to bond purchases with the rest to equities.
The fund launched its real-estate holdings, which will eventually account for up to 5 percent of its overall portfolio, by buying a 25 percent stake in the UK Crown Estate's Regent Street properties for 448 million pounds ($719 million).
The fund said it planned to invest mainly in unlisted real estate, well-developed markets and traditional property types, initially in Europe and in major cities.
"Much of the real estate activity in 2011 will be in Britain, but we also have begun to look at France and Germany," Slyngstad told reporters, adding the fund would not look at investing in U.S. real estate before 2012 or 2013.
Finance Minister Sigbjoern Johnsen told Reuters the fund would expand its real estate holdings "cautiously", while Slyngsad said it may take half a decade or longer for the real estate portfolio to reach 5 percent of the fund's overall value.
The Regent Street portfolio consists of 113 buildings owned by the Crown Estate, on behalf of Britain, in one of London's main shopping districts.
The SWF said oil major BP (BP.L) -- whose Macondo well blew out in the Gulf of Mexico in April, leading to the worst-ever oil spill -- was its most profitable investment in the quarter. In the second quarter BP was the worst performer.
Some other top performers in the fund were Spanish telecom company Telefonica (TEF.MC) and oil major Royal Dutch Shell (RDSa.L). The worst third-quarter performers were U.S. banks Wells Fargo (WFC.N) and Bank of America (BAC.N) together with Swiss drugmaker Roche ROG.VX. ($1=5.779 Norwegian Crown) (Editing by Stephen Nisbet)