UPDATE 1-Japan machinery orders slide more than expected, China risk looms

(Adds analyst's quote, graphic link, details)

* Aug machinery orders -3.3 pct vs f'cast -2.5 pct

* Govt maintains view on machinery orders

* Analysts warn of murky economic outlook

By Kaori Kaneko

TOKYO, Oct 11 (Reuters) - Japan's core machinery orders fellmore than expected in August after two straight months of gains,a sign that Europe's debt crisis and weakening exports to Chinaare beginning to sap corporate appetite to spend.

The data bodes ill for the world's third-largest economy,which has been relying on resilience in private consumption andcapital expenditure to support growth even as the globalslowdown hurts exports.

Weakness in corporate capital spending adds pressure on theBank of Japan to ease monetary policy again at its nextpolicy-setting meeting on Oct. 30, when it is set to cut itslong-term economic forecasts and admit that it may be severalmore years before the central bank's target of 1 percentinflation can materialise.

Japan's capital spending has been lacking momentum ascompanies put off business expenditures because of uncertaintyover global growth prospects, while the BOJ's key tankan surveyshowed this month big firms expect capital expenditure to rise6.4 percent in the year to next March.

A dispute with China over sovereignty of some islands isadding to concerns about the outlook for Japanese corporateactivity and exports to China, analysts said.

"Manufacturing sectors including steel and transport draggeddown the core orders, and companies are likely to delay capitalspending further with overseas economies showing no signs ofbottoming out," said Takeshi Minami, chief economist atNorinchukin Research Institute in Tokyo.

"The biggest risk is a slowdown in China, and theterritorial dispute has prompted a sharp drop in demand forJapanese products there, raising concerns for Japanese firms. Assuch, the Bank of Japan may further cut its economic assessmentand ease monetary policy further as early as this month if weakeconomic indicators persist."


Graphic on machine machinery orders:


Core machinery orders, a highly volatile series regarded asan indicator of capital spending in the coming six to ninemonths, fell 3.3 percent in August, bigger than the medianforecast for a 2.5 percent decline in a Reuters poll andfollowed a 4.6 percent gain in July.

Compared with a year earlier, core orders, a highly volatiledata series regarded as an indicator of capital spending in thecoming six to nine months, dropped 6.1 percent in August, datafrom the Cabinet Office showed on Thursday.

The Cabinet Office, which compiles the data series, kept itsassessment of machinery orders, saying that they are seesawing.

Japan's economy has outperformed most of its peers in theGroup of Seven on spending for rebuilding from last year'searthquake. But with that effect fading, domestic demand may notmake up for falling exports for much longer, analysts say.

Adding to concerns for the export-reliant economy, theInternational Monetary Fund said on Tuesday China's economicgrowth was expected to weaken to 7.8 percent this year as itwarned of risks to emerging Asia if the euro zone crisis worsensand the United States does not avoid its "fiscal cliff".

Japanese factory output fell to a 15-month low in August onsagging sales to top export market China and business sentimentsoured in the three months to September, fuelling concerns thatthe economy has stalled and may slip into recession.

That has kept the BOJ under pressure for further stimulus,despite loosening monetary policy last month to preventweakening exports from derailing a fragile economic recovery.The central bank kept monetary policy on hold last week, butanalysts see a good chance of further easing at another ratereview scheduled on Oct. 30.

(Writing by Tetsushi Kajimoto)