UPDATE 1-German industry output falls despite rosy business outlook

* Industrial production down 0.6 pct in December

* Weaker that forecast of 0.5 pct decrease

* Surge in orders points to strong growth to come (Adds analyst, background)

BERLIN, Feb 7 (Reuters) - German factories shifted into a lower gear at the end of 2017 with industry output falling more than expected in December, but a surge in orders and buoyant business sentiment point to solid growth in Europe's largest economy in the coming months.

Industrial output edged down by 0.6 percent after rising by an upwardly revised 3.1 percent in November, the Statistics Office said on Tuesday. The December reading compared with the mid-range forecast in a Reuters poll for a fall of 0.5 percent.

Capital Economics analyst Jennifer McKeown said the fall came as no surprise after the surge in November and it was very unlikely to mark the start of a downward trend.

"The outlook for industry and the economy as a whole remains positive," McKeown said.

A breakdown of the data, provided by the Economy Ministry, showed that factories produced fewer capital goods and consumer goods while they churned out more intermediate goods. Construction activity was also feeble.

From October to December, industrial output rose by 0.7 percent. "The fourth quarter was significantly weaker than the previous three quarters," the ministry said.

"Nonetheless, the trend in output is clearly pointing upwards and with the strong order intake in December and good sentiment, strong industrial activity is expected over the coming months," the ministry said.

Industrial orders posted a stronger-than-expected rise of 3.8 percent in December and business morale in January jumped back to reach November's record high.

The government expects the economy to grow by 2.4 percent this year after expanding by 2.2 percent in 2017, which was the strongest rate in six years.

The surprisingly bullish figures are contrasting sharply with a political impasse in Germany as Chancellor Angela Merkel's conservatives are struggling to form a coalition government with the centre-left Social Democrats.

(Reporting by Michael Nienaber; Editing by Raissa Kasolowsky)