* Retails sales cast shadow over economic upswing
* Analyst says economy doing well, sales a volatile indicator
* Unemployment rate lowest since reunification in 1990 (Combines unemployment data and retail figures)
BERLIN, Aug 31 (Reuters) - German unemployment fell slightly less than expected in August while retail sales posted a surprisingly big monthly drop in July, data showed on Thursday, casting some doubt over whether a consumption-led upswing in Europe's biggest economy will last.
Household spending has overtaken exports as the main driver of growth as Germans revel in record-high employment, increased job security, rising real wages and ultra-low borrowing costs.
The economy's rude health has helped centre-right Chancellor Angela Merkel, who polls show looks set to win a Sept. 24 federal election, burnish her economic credentials with voters and promise full employment by 2025.
In a sign of some weakness in consumer spending, retail sales fell by 1.2 percent on the month in real terms in July, data from the Federal Statistics Office showed on Thursday.
That compared with the Reuters consensus forecast for a 0.4 percent fall and followed an upwardly revised increase of 1.3 percent in June.
On the year, retail sales rose 2.7 percent, undershooting the consensus forecast for an increase of 3.5 percent.
Sal. Oppenheim economist Ulrike Kastens cautioned against reading too much into the retail figures for July, pointing out that the highly volatile indicator was often subject to revision and that the sector enjoyed an unusually strong month in June.
"Germany's economic engine is still running smoothly. Private consumption will contribute to overall growth also in the third quarter," Kastens added.
A survey last week showed already buoyant consumer sentiment continued to rise further heading into September.
Economists expect the German economy to continue its consumption-led upswing in the second half of the year after gross domestic product grew by 2.0 percent on the year in the first quarter and by 2.1 percent in the second.
The government predicts calendar-adjusted growth of 1.9 percent for 2017. That would be on a par with last year's performance, which was the strongest among the G7 group of the world's most industrialised countries.
The export industry also showed strength as engineering orders jumped by 10 percent in real terms in July from the previous year, the VDMA industry association said on Thursday.
The jobless total fell by 5,000 to 2.532 million in seasonally adjusted terms, the Federal Labour Office said. This came in marginally weaker than the consensus forecast in a Reuters poll for a fall of 6,000.
The unemployment rate was unchanged at 5.7 percent, the lowest level since reunification in 1990.
"The labour market is continuing its positive trend," said Detlef Scheele, head of the Labour Office. "The strong growth in employment is continuing and companies' demand for new staff is still high." (writing by Michael Nienaber; Editing by Jon Boyle)