UPDATE 1-Euro zone retail sales fall, bode ill for recovery

* Figures well below expectations

* Suggest weak consumer demand, fragile recovery

BRUSSELS, Nov 5 - Euro zone retail sales fell unexpectedly in September from the previous month, data showed on Thursday, pointing to weak consumer demand and putting a question mark over the strength of any economic recovery.

Retail sales in the 16-country area decreased by 0.7 percent against August, the biggest monthly fall since October 2008, European Union statistics agency Eurostat said. Sales dropped 3.6 percent year-on-year.

Economists polled by Reuters had on average expected a 0.2 percent increase versus the previous month and a 2.4 percent drop year-on-year.

The data suggested consumer demand was unlikely to have played a big role in what is expected to have been a revival in the third quarter from the worst economic crisis since World War Two.

"These figures are consistent with the idea that the recovery will be moderate over the coming quarters," said Nick Kounis, chief economist at Fortis.

Growth will rather depend on government spending as tens of billions of euros are being pumped into the economy, and on companies replenishing their inventories, economists have said.

The European Central Bank is expected later on Thursday to keep its main interest rate at 1.0 percent, a historic low that the European Commission has said is helping economic recovery.

JOBLESSNESS CURBING DEMAND

The Commission has estimated that the euro zone emerged from recession in the third quarter with quarterly growth of 0.5 percent, a rate likely to slow to 0.2 percent in the last three months of the year.

This compared with a 0.1 percent contraction in the second quarter.

The economy is expected to shrink by 4.0 percent in the whole of 2009 and grow by 0.7 percent in 2010, it said.

Any expansion is likely to be limited due to growing unemployment, which in September hit 9.7 percent, its highest since January 1999. Joblessness is expected to grow until the end of next year, curbing households' spending power.

"High and rising unemployment across the euro zone, likely muted wage growth over the coming months, the ending of the car scrappage schemes and modestly rising inflation before long will likely limit the upside for consumer spending," said Howard Archer, chief European economist at IHS Global Insight.

Among countries that have reported figures, monthly sales increased in Austria, Belgium, Finland and Slovakia while they fell in Germany, the euro zone's biggest economy.

In the wider, 27-nation European Union, sales fell 0.4 percent on the month and 2.5 percent year-on-year.

Dismal figures for the Baltic republics highlighted the depth of their economic crisis. In Estonia, Latvia and Lithuania, sales fell 20.8 percent, 30.9 percent and 25.7 percent, respectively, year-on-year.