UPDATE 1-Japan output up but slowdown seen as stimulus fades

* Output rises 1.8 pct in August, slowing for 4th month

* Manufacturers surveyed forecast slowdown in Sept

* Stimulus effect may be starting to fade, analysts say

TOKYO, Sept 30 - Japanese industrial output rose in August but the pace of gain slowed for the fourth straight month and manufacturers expect a further slowdown in September, a sign the impact of government stimulus spending is starting to fade.

The government is unlikely to unwelcome the data as it tries to balance its drive to cut spending with demands for an extra budget to ensure Japan recovers from its worst recession since World War Two.

"The effect of government stimulus is beginning to fade. The automobile sector has been buoyed by stimulus and tax breaks, and the benefits have spread broadly to other sectors, but that isn't going to last forever," said Takeshi Minami, chief economist at Norinchukin Research Institute.

"Output has recovered sharply, but will gradually return to a natural level of growth and could briefly turn negative. It will sustain a gradual uptrend, but the outlook is patchy."

The 1.8 percent rise in output in August marked the sixth straight month of increase but was smaller than the 2.1 percent gain in July and below the 1.9 percent rise forecast by economists polled by Reuters.

Manufacturers surveyed by the ministry expect output to rise 1.1 percent in September, much slower than the previous forecast of a 3.2 percent increase. They forecast a 2.2 percent rise in October.

Japan's economy emerged from recession in April-June at a slower pace than the government initially estimated as inventories fell more than early data had shown. This could be a positive for industrial output in the short run as companies restock goods.

Analysts are more cautious on the long-term outlook as falling wages and rising unemployment will harm Japan's domestic demand. Stimulus measures in overseas economies, which lifted exports, are also starting to fade.