UPDATE 3-UPS profit gain overshadowed by trade war worries, shares fall

(Adds detail on international results, executive comment)

Oct 24 (Reuters) - United Parcel Service Inc's reported a 20 percent rise in quarterly profit on Wednesday, but shares dropped 3 percent after it said the U.S. trade war with China contributed to disappointing international results.

Investors consider UPS a bellwether for the U.S. economy and they seized on news that President Donald Trump's shift to more protectionist trade policies was affecting its business.

UPS shares were down $3.37 at $110.87 in early trade after the company attributed an 11.6 percent decline in international package operating profit to unhedged currency in emerging markets, fuel expenses and slowing economic activity due to changing trade policies.

"Concerns over unresolved trade issues between China and the U.S. as well as Brexit continued to be a focus for our customers," Chief Executive David Abney said on a call with analysts. "We are assisting them with contingency planning."

Brexit refers to Britain's exit from the European Union.

The rapid rise in online shopping has been a boon for domestic package volume at UPS, but it has left the company scrambling to cut extra costs related to delivering parcels to households compared with businesses that generally receive parcels in bulk. Operating profit was down 6.1 percent for the U.S. package segment during the latest quarter.

UPS is spending billions of dollars to upgrade and expand its network to address competition from FedEx Corp and Amazon.com and is in the early stages of its largest capital spending campaign since the 1980s.

The world's largest delivery company said revenue at its U.S. package services rose 8.1 percent in the third quarter, while revenue at its international package segment rose 3 percent.

Net income rose to $1.51 billion, or $1.73 per share, in the third quarter ended Sept. 30, as its tax expense fell to $381 million.

Excluding items, the company earned $1.82 per share, in line with analysts' expectations, according to Refinitiv data.

Total revenue rose 8 percent to $17.44 billion, narrowly missing expectations for $17.46 billion.

The company said it now expects free cash flow to be over $5 billion but stuck to its forecast for full-year adjusted earnings of $7.03 to $7.37 per share. (Reporting by Lisa Baertlein in Los Angeles and Rachit Vats in Bengaluru; Editing by Arun Koyyur and Susan Thomas)