Updated from 11:31 a.m. EDT

Hilton Hotels ( HLT) posted a better-than-expected third quarter Thursday as the cyclical travel recovery continued to barrel along, boosting occupancy and room rates.

However, like rival Starwood Hotels and Resorts ( HOT) a day before, Hilton Hotels watched its shares slump on investor disappointment with its 2006 outlook.

Although the Beverly Hills, Calif., company expects still-strong unit revenue growth next year, its earnings outlook fell short of Wall Street's estimates. Shares of Hilton Hotels were falling 68 cents, or 3.4%, to $19.13.

During a conference call, Hilton Hotels executives also declined to provide an update on talks to acquire the hotel business of Britain's Hilton Group PLC, which owns and manages the Hilton brand outside the U.S. The two companies confirmed the discussions earlier this month. Investors are waiting anxiously for details about how a potential deal might dilute their shares or boost Hilton Hotels' debt.

The company said it earned $89 million, or 22 cents a share, in the latest quarter, up 46% from $61 million, or 15 cents a share, a year before. On average, Wall Street analysts expected EPS of 20 cents, according to Thomson First Call.

Revenue totaled $1.10 billion, up 7% from $1.03 billion a year before and slightly ahead of the $1.06 billion analyst consensus.

Hilton Hotels said strong demand from all segments -- business, convention and leisure travelers -- boosted occupancy and room rates. That drove double-digit percentage increases in revenue per available room, a key industry metric also known as revpar, at many of the hotels the company owns. New York City and Hawaii remained Hilton's two strongest markets, while stragglers Chicago and San Francisco continued to improve.

Excluding hotels in hurricane-ravaged New Orleans, revpar at hotels the company owns rose 13.3% year over year. Meanwhile, margins at owned hotels rose 220 basis points to 28.8% in the third quarter from last year.

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