BlackRock Inc , the world's largest asset manager, said first-quarter profits were steady, bolstered by strong inflows into its popular iShares exchange-traded fund business.

But despite the inflows and booming equity markets during the first quarter, revenue at New York-based BlackRock declined $33 million, or 1 percent, to $2.2 billion, the firm said on Wednesday. Investors continued to favor the firm's indexed funds over actively managed accounts, which typically generate higher fees, though not necessarily higher profit margins.

Shares of BlackRock fell 2.9 percent to $196.01 on Wednesday on the New York Stock Exchange. The shares have gained 10 percent this year, matching the 10 percent gain in the S&P 500 index <.SPX>.

Investors were somewhat disappointed with Chief Executive Laurence Fink's tepid outlook for flows into higher-fee equity funds for the rest of the year, Mac Sykes, an analyst at Gabelli & Co, said. Extra spending required to meet regulatory mandates and other demands could also reduce profit margins, Sykes said.

While investors have begun to move some assets from cash and short-term bonds to equities and longer-term debt, a shift known as de-risking, there has yet been no major shift in investor attitudes, CEO Fink said on a call with analysts.

Many investors remain more fearful about potential problems in Europe than hopeful that the issues have been resolved, he explained. I would still qualify the market to be quite fragile, Fink said.

Fink kept a tight hand on expenses during the quarter. Even as BlackRock rolled out a new global ad campaign around the slogan Investing for a New World, Fink cut operating expenses by $50 million, or 3 percent, to $1.4 billion on lower office occupancy, fund and compensation costs.

Net income increased to $572 million, or $3.14 per share, from $568 million, or $2.89 per share, in the same quarter a year before.

Assets under management at BlackRock totaled $3.68 trillion, up 5 percent during the quarter and 1 percent from a year earlier.

Customers withdrew a net $10.3 billion from long-term funds; but excluding a single, previously announced withdrawal of $36 billion from an indexed fixed income account, BlackRock said it had inflow of $25.7 billion. Just in iShares alone, customers added a net $18.2 billion, a 74 percent increase from the same quarter last year. Over half the total went into bond ETFs.

The flows reflected a preference for BlackRock's indexed offerings. For example, investors added $7.4 billion to stock index funds and withdrew $4.5 billion from active stock funds.

BlackRock, which is partially owned by PNC Financial Services Group Inc

and Barclays Plc , also offered an update about its plan to open a private trading platform for bonds which was first discussed in 2010.

The system, which has not been approved by regulators yet, is related to the firm's Aladdin risk management service which covers $10 trillion of assets. It would let BlackRock customers who use the risk management service trade bonds among themselves and with BlackRock fund managers, bypassing Wall Street dealers.

The trading platform would help users reduce the cost of buying and selling bonds if Wall Street firms cut back on their participation in the market because of new regulations like the Volcker rule, which limits proprietary trading, CEO Fink said. If Wall Street steps back, as many expect, the bid/ask spreads to trade bonds could widen, Fink explained.

If the problem does not materialize, BlackRock's new trading platform will not be needed, he added. If we could see a narrowing in bid/ask spreads, we don't need the Aladdin trading platform, Fink said.

BlackRock's profit per share increased 9 percent in the first quarter even as net income rose less than 1 percent. BlackRock's number of fully diluted shares outstanding declined to 182 million from 194 million a year earlier.

Excluding the costs of some compensation plans and some other expenses, the firm earned $3.16 per share. On that basis, analysts on average had expected $3.04, according to Thomson Reuters I/B/E/S.

(Reporting By Aaron Pressman; Editing by Gerald E. McCormick, Dave Zimmerman, Gunna Dickson)