UPDATE 1-Swiss economy set for worst performance in eight years

* Swiss GDP seen growing at slowest pace since 2009 - gov't

* Pick-up expected in 2018 as exports increase

* Latest trade data show exports rising 3.9 pct in August (Rewrites adding details, comments from analysts)

ZURICH, Sept 21 (Reuters) - Switzerland economy will fall short of 1 percent growth this year, the government said on Thursday, the weakest performance in eight years.

The State Secretariat for Economic Affairs (SECO) said it now expects economic growth of 0.9 percent in 2017, below its June forecast of 1.4 percent.

The figure would be the lowest since the economy shrank 2.2 percent in 2009.

Around half of the reduced forecast was attributed to a primarily technical downward revision of SECO's figures for the end of 2016 and start of 2017, which will reduce overall GDP growth for 2017 as a whole.

"The Swiss economy is only gradually returning to a dynamic growth path," SECO said in a statement.

"Although in both manufacturing and the hotel and catering industry the recovery from the slump of the last few years continued, this recovery was offset by sluggish growth in most other service sectors."

The figures were the latest downgrading of the Swiss economy outlook following reduced forecasts by the Swiss National Bank and Credit Suisse.

SECO said it expected GDP growth to accelerate to 2 percent next year, citing stronger growth in the global economy and a pick up in Swiss export, aided by the recent weakening of the Swiss franc.

In a bright spot, Swiss exports increased by 3.9 percent in August, the Swiss customs office reported on Thursday, with the country's embattled watch sector also logging a 4.2 percent increase.

"The Swiss export sector is benefiting from the healthy global economy, and will do so all the more if the Swiss franc, which has depreciated in the summer, maintains its new level," SECO said.

Credit Suisse earlier this week also reduced its forecast for the Swiss economy to grow at a rate of 1 percent, down from its earlier view of 1.5 percent.

Credit Suisse economist Claude Maurer said he expected the Swiss economy to gain momentum during the second half of 2017, and continue into 2018, where he forecast growth of 1.7 percent driven by increased investment by Swiss companies.

"Investments will pick up next year," he said. "For the economy as a whole, the exchange rate is tolerable. The franc is still overvalued and is still a drag on growth, but not as much as it used to be." (Reporting by John Revill)