UPDATE 2-Consumers buoy Mexico growth pickup, industry weighs

* Mexican GDP expands 0.8 percent in 4th quarter, qtr/qtr

* Grew 3.2 percent compared to Q4 2011, missing forecast

* Annual growth notches 3.9 pct, in line with 2011

MEXICO CITY, Feb 18 (Reuters) - Mexico's growth picked up in the final months of last year as strength in consumer spending buoyed Latin America's no. 2 economy but a fall in industrial activity backed bets on lower interest rates ahead.

Mexico's economy grew 0.8 percent in the fourth quarter compared to the third, double the previous quarter's downwardly revised 0.38 percent rate, the national statistics agency said on Monday. Economists in a Reuters poll had projected a 0.6 percent expansion in the fourth quarter.

Spending on services and solid U.S. demand for Mexican exports has helped support Latin America's second-biggest economy amid weak global growth, but fears that U.S. tax hikes and spending cuts would sap demand weighed on manufacturing output.

Growth was driven by strength in services, which makes up two-thirds of economic output, and farming, and came despite manufacturing, mining, and construction notching their first quarterly contraction since early 2009, in the midst of a deep recession.

Although full-year growth of 3.9 percent matched 2011's rate, fourth-quarter growth compared to a year earlier missed expectations at 3.2 percent and the economy is seen losing steam in the first half of 2013.

Mexico's central bank said in January that it could lower its benchmark interest rate from 4.50 percent if inflation continues to cool and economic growth slows. Some analysts said the report boosted the likelihood of a cut.

"We're seeing a slower economic expansion rate and low inflation, which creates a window of opportunity for the central bank to make this cut," said Rafael Camarena, an economist at Banco Santander in Mexico city, who expects a 50-basis-point cut at the bank's March meeting.

Markets are pricing in a 64 percent chance of a 25-basis-point cut in March, but have fully priced in such a cut by April.

SERVICES SAVING GRACE

The figures showed industry contracted by 0.21 percent in the fourth quarter, compared with a 0.44 percent expansion notched in the third quarter. The services sector expanded 0.68 percent while agricultural activity grew 2.09 percent.

Industrial production posted its biggest monthly drop since 2009 in December as Mexican factory managers burned through inventories amid uncertainty about U.S. budget tightening that was due to start at the start of 2013.

U.S. lawmakers managed to avert across-the-board tax hikes, but they could still fail to reach an agreement on spending cuts that could drag on growth and that uncertainty may cast a pall over manufacturing during the first part of this year.

Construction activity fell in Q4 as public spending on infrastructure projects dried up at the end of former President Felipe Calderon's term, hitting companies such as cement maker Cemex, whose Mexican sales late last year were weaker than expected.

But strong spending on transport, real estate and financial services helped pick up the slack from the slip in industrial production.

Confidence about Mexico's internal market drove Mexican billionaire Carlos Slim to take retailer Sanborns public this month, for a capital raise just shy of $1 billion.

Mexican retailers are eyeing 5 percent growth in 2013, on continued strength in department store sales and consumer optimism, which dipped in January off a nearly five-year high notched the month prior.

Mexico's second-biggest retailer Soriana has said it is planning to invest 4.6 billion Mexican pesos ($362.69 million) to open about 60 new stores and boost its land reserves for development of future facilities.

"We're very positive about this year, just like last year. I think that Mexico is ready to grow and generate more jobs," Soriana CFO Aurelio Adan told Reuters in an interview last month.

Separate data showed economic activity slumped in December, after relatively strong expansion in the previous two months.

Mexico's IGAE indicator fell 0.99 percent in the month, its biggest fall in almost three years, dragged down again by the industrial sector. Activity was up just 1.42 percent from December 2011.