* Sticks to profit, distribution goals despite higher NII forecast

* Says needs time to review how to use bumper earnings

* Moves to grow fee income longer-term when rates normalize

* First Italian bank to decide on NII tax, opts out of paying

MILAN, Oct 24 (Reuters) - Italy's UniCredit on Tuesday beat third-quarter profit forecasts, but kept its full-year income goal unchanged and outlined plans to counter an eventual weakening in the boost from higher interest rates.

Rate hikes have fueled record bank profits in recent quarters, but uncertainty has risen, with geopolitical risks adding to strains on the economy from persistently high inflation and shrinking lending.

"We have a significant reduction in (loan) volumes and our market share is flat or actually increasing," CEO Andrea Orcel told analysts.

"It means that the market overall is going down. We don't know if it will stabilize and indeed reverse, and when that will happen."

Loan volumes stagnated in Germany and declined 3% in Italy. While still extremely low, provisions against loan losses more than doubled in the quarter.

Net interest income (NII), or income from the gap in lending and deposit rates, will compress moderately next year as banks' funding costs slowly edge higher, Orcel said.

UniCredit's NII jumped 45% annually in the third quarter, helping to drive net profit to 2.3 billion euros ($2.5 billion), well above a bank-gathered consensus forecast of 1.9 billion and up by over a third from a year ago.

Spooking investors, Italy in August slapped a surprise one-off tax on NII, only to backtrack in September and give lenders the option to set aside cash as reserves instead of paying the levy.

UniCredit, the first Italian bank to report third-quarter earnings and take an official decision on the tax, said it was putting aside 1.1 billion euros as reserves.

Most banks, including market leader Intesa Sanpaolo , are expected to take the same approach, sources have told Reuters.

FEES

UniCredit slightly raised its 2023 revenue outlook, thanks to a higher NII, but kept its profit and investor reward goals unchanged saying it needed time to decide how to best use the "exceptional" growth in earnings.

"We're reviewing all the options that we have and therefore giving you a new guidance for the bottom line and distribution is premature," Orcel said.

UniCredit forecasts a net profit of at least 7.25 billion euros in 2023, of which at least 6.5 billion it will pay out as dividends and share buybacks.

Orcel said he was confident that the bank would at least match those goals in 2024. Next year UniCredit will also decide whether to return excess capital via extraordinary share buybacks, if it finds no better uses for the cash.

UniCredit set a goal of adding 1.2 billion euros a year in fees in the long term, as Orcel works to reduce reliance on NII after his predecessor sold UniCredit's internal fund manager.

As part of plans to grow fees, UniCredit on Monday announced the purchase of a 9% stake in Alpha Bank and a commercial partnership with the Greek rival, as it merged its Romanian unit with that of Alpha.

Orcel's focus on capital-light businesses and a reduction in risk-weighted assets (RWAs) contributed to lifting core capital to 17.2% of RWAs, up from 16.6% at the end of June.

It would be at 16.3% taking into account a decision to buy back shares with 2.5 billion euros of 2023 profit, which UniCredit is planning to do before the end of the year once it gets supervisory clearance. ($1 = 0.9362 euros) (Reporting by Valentina Za, editing by Bernadette Baum and David Evans)