UPDATE 1-German business morale buoyed by flush order books

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BERLIN, Oct 17 (Reuters) - Flush order books and strong output figures boosted morale among German businesses in October, the ZEW research institute said on Tuesday, suggesting a strong phase of growth in Europe's biggest economy has further to run.

The Mannheim-based institute's monthly economic sentiment index rose to 17.6 from 17.0 in September. While that missed analysts' expectations, the ZEW said the fact that inflation had risen and was expected to rise further was a positive signal.

"(This)... equally points towards a positive economic development in Germany," said ZEW President Achim Wambach.

Rising price pressures also made a change in the European Central Bank's ultra-loose monetary policy more likely, he said.

The ECB is due to decide in October whether to extend its stimulus programme into next year. Sources have told Reuters it was likely to extend the purchases but reduce their size.

But its President Mario Draghi cautioned on Friday that the euro zone continued to need substantial monetary stimulus as inflation had not yet risen sufficiently.

Thomas Gitzel, chief economist of VP Bank Group, said the ZEW data suggested that flush industrial order books were underpinning ever more broad-based German growth.

The economy should expand by more than 2 percent this year, he said. "Assuming there is no external shock, the current economic cycle still has time to run."

Analysts polled by Reuters had expected the sentiment indicator to come in at 20.0. Another gauge, measuring investors' assessment of current economic conditions, also undershot expectations, edging down to 87.0 from 87.9. Analysts had expected 89.0.

(Reporting by Thomas Escritt and Michelle Martin; Editing by Madeline Chambers and John Stonestreet)