UPDATE 1-Japan deflation deepens, weak demand hitting prices

* Nationwide core CPI falls 2.4 pct in year to August

* Weak final demand weighing on prices

* Deflation may last longer than BOJ expects - analyst

TOKYO, Sept 29 - Japanese core consumer prices fell a record 2.4 percent in August from a year earlier, as weak final demand adds to pressure from a slide in oil prices, raising questions about the Bank of Japan's view that deflation will not warrant more policy action.

While the effect of sliding oil prices will fade from September, weak domestic consumption is threatening to prolong deflation, which would keep the central bank from raising interest rates from near zero for several years.

"Falls in oil prices are the main reason for the decline in prices. But the economy is also stagnating, and we can see that in price declines for durable goods and also services that are relevant to consumers," said Atsushi Matsumoto, an economist at Mizuho Research Institute.

"The BOJ has said annual price declines will start to slow, but it's taking a long time for this to happen, showing that deflationary pressure isn't decreasing."

Core consumer prices, which exclude volatile fresh food prices but include oil costs, fell 2.4 percent in the year to August, matching a median market forecast and bigger than a 2.2 percent drop in the year to July.

For a graphic tracking inflation in Japan, Europe and America, click: http://r.reuters.com/gex88d

In a sign deflation is becoming more entrenched, core consumer prices excluding food and energy costs fell 0.9 percent in August from a year ago.

Deflation has grown quickly since prices started declining in the year to January.

With the economy seen slowly recovering from its deepest recession since World War Two, few economists expect falls in prices to accelerate sharply.

But weak domestic demand is expected to keep deflationary pressure alive even after the effect of the retreat of oil prices from record highs last July fades.

The Bank of Japan has already forecast deflation to last until the year to March 2011 and is expected to extend its deflation forecast by another year in its next set of forecasts due out in late October.