AOL Inc's third-quarter revenue dropped 6 percent because of its dwindling dial-up Internet access business though it beat analysts expectations and its stock rose more than 11 percent.

The company reported on Wednesday revenue of $531.7 million, ahead of analysts' estimates of $524 million, according to Thomson Reuters I/B/E/S.

Investors have gotten used to disappointment from AOL especially in the forward outlook, said Benchmark analyst Clayton Moran. Mainly there are no negative surprises in this quarter... and the forward outlook seems to be more stable.

Prior to Wednesday's rally, AOL shares were down more than 40 percent year to date.

Indeed, after AOL released its third-quarter results in August its shares plunged more than 30 percent after it warned that it advertising sales were weaker than expected. [nL3E7J92PQ].

The company, which Time Warner spun off after a disastrous decade-long merger, is trying to regain its status as a popular online destination that attracts advertising dollars from the likes of auto companies and consumer packaged-goods makers.

To do that, Chief Executive Tim Armstrong has invested heavily in efforts such as building a network of more than 800 local news sites known as Patch and the $315 million acquisition of the Huffington Post.

Total advertising revenue rose 8 percent to $317.7 million on the strength of its network and international display advertising.

Overall display advertising -- representing big splashy ads that appear on Web pages and command higher rates -- rose 15 percent in the quarter.

Economic instability that typically results in a pullback in advertising spending has not dampened the prospects of AOL, Armstrong said during a call with analysts.

He believes that advertisers are going to shift more of their dollars from traditional media such as broadcast and print to online ads.

Still AOL's share of display advertising has slipped as it faces stiff competition from Yahoo, Google and Facebook, which are all going after the same ad dollars.

Research firm eMarketer estimates that AOL's share in the United States will fall to 4.2 percent this year, down from a share of 10.6 percent in 2007.

That is compared to Facebook, which is expected to surpass Yahoo's share for the first time this year reaching a 16.3 percent share, according to eMarketer.

On top of it, AOL is losing subscribers to its lucrative access business. Subscription revenue, which represents 36 percent of total revenue, declined 22 percent to $192 million.

At the beginning of October, Armstrong had been meeting with investors pushing an idea of a tie-up with Yahoo, which is currently undergoing its own strategic review and search for new leadership. A combination with Yahoo could appease ad agencies looking for more efficient ad purchases with a bigger audience, said two shareholders at the time.

Armstrong said he plans to continue to execute our strategy when asked about strategic options on a press call on Wednesday.

AOL reported a third-quarter loss of $2.6 million, or 2 cents per share, from continuing operations, compared with a profit of $171.6 million, or $1.61 per share, a year ago.

Analysts were expecting a loss of 6 cents.

(Reporting by Jennifer Saba in New York and Sruthi Ramakrishnan in Bangalore; Editing by Joyjeet Das, Maureen Bavdek and Derek Caney)