* Govt cuts view on factory output for 3rd month in row
* Territorial spat between Japan and China may hit sales
* Business mood worsens, especially among manufacturers
By Kaori Kaneko
TOKYO, Oct 12 (Reuters) - Japan's government downgraded itsview of the economy for the third month in October as worriesabout Europe's debt crisis and China's slowdown intensified,adding risk to the growth outlook.
Slackening overseas demand and thus weak exports promptedthe government to lower its assessment on factory output for thethird straight month.
"The economic recovery has had a weak tone recently due to aslowdown in the global economy, although some steadiness isstill shown," the Cabinet Office said in its latest monthlyreport on Friday.
The Cabinet office downgrade followed the Bank of Japan'swarning last week that economic activity was levelling off,offering a slightly bleaker view from the previous month.
The Cabinet Office said factory output is decreasing, butmaintained its view of exports as weak in tone.
The latest data showed Japan's industrial production fell toa 15-month low in August on sagging sales to top export marketChina and business confidence dented by euro zone crisis.
The government also cut its assessment of corporatesentiment for the first time since December last year, notingbig companies were cautious, particularly manufacturers.
The BOJ's tankan business sentiment survey showed the moodamong big manufacturers worsened in the three months toSeptember and will stay gloomy.
The government is cautious about the impact from tensionbetween Japan and China over the islands in the East China Seaknown as the Senkaku in Japan or Diaoyu in China.
The territorial dispute sparked anti-Japan demonstrations inChina and calls for boycotts of Japanese goods.
"Trouble stemming from the Senkaku islands is affectingbusinesses including the auto sector, which would also impactother related industries such as materials and iron and steel ,"said Minoru Masujima, director of macroeconomic analysis at theCabinet Office.
The government still projects the economy will likely returnto a recovery path, but uncertainty about the global economicoutlook remains prevalent, particularly the prospects of Europeand China.
(Editing by Eric meijer)
Keywords: JAPAN ECONOMY/REPORT