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UPDATE 1-Norway's wealth fund posts strong Q3, reiterates warning of market volatility

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OSLO, Oct 27 (Reuters) - Norway's $1 trillion sovereign wealth fund, the world's largest, reported returns of 3.2 percent in the third quarter, beating its benchmark by 0.1 percentage point as equity markets soared, it said on Friday.

"We must be prepared for volatile stock markets, and cannot expect such a return every quarter," the fund's Chief Executive Yngve Slyngstad said in a statement, reiterating an earlier warning.

The government withdrew 10 billion crowns during the third quarter to pay for public expenses. By comparison, it had taken out 16 billion crowns in the second quarter.

The world's largest sovereign wealth fund was built with income from Norway's offshore oil and gas industry and now corresponds to about 2.5 times its annual gross domestic product.

At the end of the third quarter, the fund lowered its fixed income holdings to 31.6 percent from 32.4 percent at end of the second quarter, while it raised its equities holdings to 65.9 from 65.1 percent.

Real estate investments were stable at 2.5 percent of the fund's value quarter on quarter. (Reporting by Oslo newsroom; Editing by Robin Pomeroy)