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UPDATE 1-German domestic demand for factory equipment seen rising

* Domestic orders up 6 pct August-October

* 2017 sales seen at 224 billion euros

* Brexit causing "serious concerns" (Adds regional forecasts, comments on German demand, Britain)

FRANKFURT, Dec 12 (Reuters) - German engineering output is likely to grow at a steady 3 percent next year as domestic manufacturers begin to reinvest in equipment, compensating for slower export growth to China, industry association VDMA said on Tuesday.

Engineering is still the backbone of Germany's economy - which is set to grow by more than 2 percent this year - generating an expected 224 billion euros ($264 billion) in sales this year and employing about 1.35 million people.

"We see the first signs that domestic demand is rising," VDMA Chief Economist Ralph Wiechers told a news conference at the organisation's headquarters. "Domestic business will play a bigger role in growth than in the past years."

Domestic orders for machinery rose 6 percent in the three months to end-October, the VDMA said.

Domestic consumption is also lifting the wider German economy, which is traditionally powered by exports. German exports as a whole fell unexpectedly in October, as did industrial exports.

Wiechers said growth in the Chinese engineering market, which has driven German exports for the past few years, would likely slow to 6 percent in 2018 from 8 percent in 2017.

The VDMA's exports to China grew 24 percent in the first nine months of 2017.

Market growth in the United States, the VDMA's top export destination, is expected to slow to 2 from 3 percent. VDMA exports grew 11 percent in January-September.

The association said the industry would have to continue to live with many uncertainties, in particular Britain's plan to exit the European Union.

German engineering exports to Britain - the VDMA's fifth-biggest market - fell 4.5 percent in the first nine months of 2017, and the VDMA said it estimated that German engineers could face additional costs of more than 180 million euros a year if the UK left the EU's customs union.

"Brexit is causing us serious concerns," said VDMA President Carl Martin Welcker. "They say things are never as bad as they seem, but I don't see the Brits preparing properly." ($1 = 0.8495 euros) (Reporting by Georgina Prodhan; Editing by Victoria Bryan and Gareth Jones)