UPDATE 2-Simon Property Group first-quarter FFO up 7 pct

(Recasts first paragraph, adds CEO quote, bankruptcy data)

By Ilaina Jonas

NEW YORK, April 29 (Reuters) - Simon Property Group Inc SPG.N, the largest U.S. mall operator, reported a 7 percent rise in first-quarter funds from operations on Tuesday but said bankruptcies of its retailer tenants spiked, sending its shares down over 2 percent.

During the quarter, Simon, which manages about 259 million square feet of malls, outlet centers and shopping centers, saw rented space lost to retailer bankruptcies reach 133,000 square feet at its malls compared with 24,000 square feet a year earlier.

At its high-end outlet centers, a dozen stores were vacated primarily by four retailers, who either closed stores or shuttered operations because of bankruptcy.

"I think the big issue for us, the rest of this year and into early '09 is going to be with store closings," David Simon said in a conference call with analysts. "That will put some space on the table for us, so we're going to be in the process of re-leasing."

For the first quarter, Simon reported FFO, a performance measure for real estate investment trusts, of $420.1 million, or $1.46 per share, up from $392.4 million, or $1.37 per share, a year earlier, beating analysts' average forecast of $1.44 per share, according to Reuters Estimates.

FFO removes the profit-reducing effect that depreciation, a noncash accounting item, has on earnings.

Rising gasoline and food prices and the weak housing market have pinched U.S. consumers and caused trouble for some retailers. U.S. consumer confidence fell to a five-year low in April, the Conference Board, a private business and research organization, said on Tuesday.