Goldman Sachs Group Inc lost $428 million in the third quarter, only its second quarterly loss as a public company, as its investment portfolio tanked and trading revenue fell.

The results underscore how investment banks can face headaches from their assets even as regulators clamp down on risk-taking.

Goldman, the largest U.S. investment bank by assets, signaled that it is taking steps to cut costs, including employee pay, for the benefit of shareholders. Its shares rose 2.4 percent in early trading to $99.23.

In a statement, Chief Executive Lloyd Blankfein blamed the loss on difficult market conditions and a lack of confidence among investors and corporate clients.

Our results were significantly impacted by the environment and we were disappointed to record a loss in the quarter, Blankfein said.

The loss amounted to 84 cents per share, much deeper than the loss of 16 cents expected, on average, by analysts.

Since going public in 1999, the only other quarter in which Goldman was in the red was a $1.6 billion loss in the fourth quarter of 2008, after the demise of Lehman Brothers.

The bank's third-quarter net revenue totaled $3.6 billion, down 60 percent from a year earlier -- its sixth consecutive year-over-year revenue decline. Wall Street has struggled with new regulations and choppy markets.

As profitability shrinks in the industry -- Goldman generated a return on equity of just 6 percent for the first three quarters of 2011, even ignoring a special charge -- the bank is cutting costs. It cut its workforce by 4 percent during the quarter, helping to lower compensation costs by 59 percent.

During the pre-crisis era, Goldman could generate a return on equity of more than 30 percent per quarter.

Although revenue declined in some of Goldman's core banking and trading businesses, the main source of losses was its Investing & Lending division, which uses the firm's own capital to make long-term investments.

Revenue from that division has fluctuated wildly since Goldman restructured into different business segments at the start of 2011.

The division reported negative revenue of $2.48 billion for the third quarter as asset values dropped sharply. Goldman's stock investment in Industrial and Commercial Bank of China Ltd alone generated more than $1 billion of paper losses.

The U.S. financial reform law known as Dodd-Frank features a provision called the Volcker Rule, which is meant to limit banks' betting with their own money. Regulators last week released a draft of the rule. which focuses on short-term trading.

Big declines in Goldman's bond-trading and underwriting revenue also weighed on results, more than offsetting gains from equity sales and trading and its advisory business.

Goldman's fixed income, currency and commodities client trading business -- once a key profit driver for the bank -- reported $1.73 billion in revenue, a 36 percent decline from a year earlier.

Equities sales and trading is now a larger slice of Goldman's revenue pie, as higher trading volumes led to bigger commissions. That business reported $2.3 billion in revenue, up 18 percent.

The bank's underwriting business suffered as clients held back on issuing new securities into volatile markets. Underwriting revenue dropped 61 percent to $258 million, while advisory revenue rose 5 percent to $523 million.

In the year-earlier third quarter Goldman posted a profit of $2.98 per share.

(Reporting by Lauren Tara LaCapra in New York; editing by Dan Wilchins and John Wallace)

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