Higher incentives, strong dollar weigh on MasterCard's revenue

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* 2nd-qtr rebates, incentives rise 21 pct

* Net revenue $2.39 bln vs est. $2.41 bln

* Underlying fundamentals remain strong - analyst

By Sudarshan Varadhan

July 29 (Reuters) - MasterCard Inc, the operator of the world's second largest payment network, reported lower-than-expected quarterly revenue as it offered more rebates and incentives to win deals.

The company was also hurt by a strong dollar as markets outside the United States account for nearly 60 percent of its purchase volumes.

MasterCard's shares, however, rose 2 percent in afternoon trading, reversing course, after some analysts said the company's underlying fundamentals were strong.

"Investors were happy to see that cross-border growth rates were high at 17 percent, processed transactions 13 percent and processed volumes 13 percent," Wedbush Securities analyst Gil Luria told Reuters.

Cross-border volumes represent the value of transactions made by card holders outside the card-issuer's country.

Worldwide gross dollar volume rose 12.8 percent on a constant-currency basis, but just 1.4 percent in dollar terms, Sandler O'Neill Partners analyst Christopher Donat wrote in a note.

The dollar has risen about 21 percent in the past year.

MasterCard paid $940 million in rebates and incentives in the second quarter, up 21 percent from a year earlier.

The company usually pays higher incentives to its partners than larger rival Visa Inc (Xetra: A0NC7B - news) . Client incentives accounted for nearly 28 percent of MasterCard's gross revenue in the quarter, way above Visa's 16 percent.

Visa, which reported better-than-expected quarterly profit last week, is in talks to combine with former subsidiary Visa Europe Ltd as it gears up to take on MasterCard in the Europe market.

A combination of Visa and Visa Europe will result in a "more rational competitor," MasterCard Chief Financial Officer Martina Hund-Mejean told Reuters on Wednesday.

"When you actually look at the Visa Europe numbers, they have lower prices than us and it is because the banks that own them tell them 'please don't charge me the full value of services, charge me less'," she said.

MasterCard's net income fell 1.1 percent to $921 million in the quarter ended June 30 due to a $44 million after-tax charge related to a litigation settlement.

Excluding the charge, MasterCard earned 85 cents per share.

Net revenue rose 0.9 percent to $2.39 billion.

Analysts on average had expected earnings of 85 cents per share and revenue of $2.41 billion, according to Thomson Reuters (Dusseldorf: TOC.DU - news) I/B/E/S.

MasterCard's shares were up 2 percent at $97.10 on the New (KOSDAQ: 160550.KQ - news) York Stock Exchange, recovering from a 2 percent decline earlier. (Editing by Kirti Pandey)