* Quake of 7.1 magnitude strikes just off coast

* Death toll expected to rise

* Fallen homes, damaged churches reported in several areas (Updates death toll, adds quote, Guatemala damage)

By Gustavo Palencia

TEGUCIGALPA, May 28 (Reuters) - A powerful 7.1 magnitude earthquake shook Honduras on Thursday, killing at least four people, knocking down homes and causing damage in neighboring Guatemala.

Officials expected the death toll to rise as reports came in from the mountainous area around the coast.

The quake damaged buildings across the mountainous north of Honduras, a poor country of some 7 million people and briefly sparked a tsunami alert for Central America's Caribbean coast. coast.

A 7.1 magnitude quake can cause serious damage over a wide area.

Four children between the ages of 3 and 15 died when their homes collapsed after the earthquake struck at 2:24 a.m. local time (0824 GMT) offshore near the Honduran Caribbean resort island of Roatan.

"They were all asleep. Most of them died crushed," said Randolfo Funes, a top official at Honduras' civil protection agency. "There will be many more dead."

Security guard Pedro Ramirez, 52, was in his truck outside an office building in Tegucigalpa when the tremor hit.

"I felt the car rock and I started to hear little bits of debris from the building next door hitting the roof," he said. "It was frightening because it was shaking a lot. I've never felt anything like it."

The earthquake hit 39 miles (64 km) northeast of Roatan, the biggest of the country's three picturesque Bay Islands where snorkelers and divers come to see dolphins and a big coral reef. It had a shallow depth of 6.2 miles (10 km).

On Roatan, rescue officials said the quake had knocked out power and caused minor damage to buildings. People were outside their houses and being urged to keep away from the shore.

A tsunami watch was issued for Honduras, Guatemala and Belize, the Pacific Tsunami Warning Center said, but it was lifted about an hour later.

The quake knocked out electricity in two towns in eastern Guatemala and another town in the same area was cut off due to damaged roads.

In the Honduran town of Santa Barbara, a handful of houses collapsed and the ceiling of an old colonial church fell in. The tremor sent people running into the street and the power was cut in some areas, Honduran radio said.

Houses also fell in the port of Puerto Cortes while fires broke out in the northern business city of San Pedro Sula.

The quake was initially reported having a 7.4 magnitude.

Honduras has a small tourist industry with most visitors attracted to its Bay islands off the world's second-largest coral reef that teems with fish, sponges, rays and turtles. (Additional reporting by Cyntia Barrera Diaz and Philip Barbara; Editing by Bill Trott)

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