Warner Music Group , the world's third largest music company, on Tuesday reported a surprise quarterly loss as higher interest expense and operating costs cut into the record label's margins.

Top selling artists in the period included Jay-Z, Madonna and Japanese acts Kobukuro and Superfly, but the company noted that the shrinking demand for CD's and the weak economy hurt its revenue and is likely to affect future results.

The New York-based company posted a net loss of $18 million, or 12 cents a share, in the fiscal fourth quarter ended Sept 30, compared with a year-earlier profit of $6 million, or 4 cents a share.

Revenue rose 1 percent to $861 million, ahead of analyst forecasts, boosted primarily by growth in Japan, France and Germany. International gains were offset by weakness in the U.S. and Latin America.

The company's operating loss excluding charges for job cuts was 3 cents a share as computed by Thomson Reuters I/B/E/S, compared with an average profit estimate of 5 cents per share on revenue of $820.3 million.

Warner Music's total costs and expenses in the fourth quarter increased by 2 percent, and its margin from continuing operations declined 1.5 percentage points to 6.3 percent.

Like other music companies, Warner Music is struggling with shrinking sales of recorded music as fewer fans buy albums on CDs. The transition to downloaded music has led to a decline in revenue throughout the industry as fans increasingly buy lower-priced individual songs from Web retailers like Apple Inc's iTunes Music Store.

Warner Music said its digital music sales rose 10 percent from the prior year to $184 million, or 21 percent of total revenue in quarter.

Shares of Warner Music were not yet trading on Tuesday after closing at $7.06 yesterday on the New York Stock Exchange.

(Reporting by Yinka Adegoke and Franklin Paul; Editing by Derek Caney)