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UPDATE 1-Brazil's Vale says Q3 profit fell 66 pct to $1.67 bln

* Vale profit hurt by slowing world economy

* Net income in quarter worse than expectations

(Adds additional result detail, analyst expectations.)

RIO DE JANEIRO, Oct 24 (Reuters) - Brazil's Vale SA , the world's No. 2 mining company, said on Wednesday that third-quarter profit fell 66 percent compared with a year earlier after the price of iron ore dropped to three-year lows.

The result was slightly worse than the average of analysts' expectations.

Net income in the three months ending Sept. 30 was $1.67 billion, compared with $4.94 billion a year earlier, Vale said in a statement. Vale is the world's largest producer of iron ore, the main ingredient in steel.

The average profit estimate of 19 analysts surveyed by Reuters was $1.92 billion. The third quarter result was the worst in nearly three years. Profit fell 37 percent compared with the second quarter.

``Vale's performance in the third quarter reflected the challenges resulting from volatility of falling prices that happened as a result of the slowing of growth in the world economy,'' the company said in the statement.

Net sales, or total sales minus sales taxes, fell 34 percent to $10.7 billion. The average net sales estimate in the survey was $10.4 billion.

Profit was also hurt by the company's decision to set aside about $542 million for the possible payment of back royalties in a dispute with Brazil's government.

(Reporting by Jeb Blount and Sabrina Lorenzi; editing by Jim Marshall)