UPDATE 1-Japan household spending posts biggest drop in nearly a year

(Adds detail, background)

* Feb household spending down 0.9 pct vs f'cast +0.3 pct

* Data comes in wake of worsening business sentiment

* BOJ may cut price f'casts in April review - analysts

TOKYO, April 6 (Reuters) - Japan's household spending suffered the biggest annual decline in nearly a year in February, data showed on Friday, reinforcing the view that slow wage growth is keeping consumers from loosening their purse strings.

The data comes in the wake of a central bank survey that showed business sentiment souring for the first time in two years, suggesting the economy may be peaking from a longest uninterrupted streak of expansion since the 1980s asset bubble period.

Household spending fell 0.9 percent in February from a year earlier, government data showed, confounding a median market forecast for a 0.3 percent gain.

The drop, which followed a 1.9 percent increase in January, was the biggest since a 1.4 percent fall in April last year.

Consumption has been a soft spot in an otherwise robust recovery, hampering the BOJ's efforts to achieve its inflation target as firms remain wary of raising prices for fear of scaring away cost-sensitive households.

Data released on Wednesday showed activity in Japan's service sector expanded at the slowest pace in 17 months in March, suggesting a slight moderation in growth.

Japan's economy expanded an annualized 1.6 percent in the October-December quarter, marking the eighth straight quarter of gains, on robust global demand and capital spending.

But core consumer inflation stood at 1.0 percent in February, well below the BOJ's 2 percent target, as slow wage growth keeps consumers from increasing their spending.

Corporate Japan expects to see only minimal inflation in a year, a BOJ survey showed on Tuesday, indicating the difficulty the bank faces in hitting its elusive price target.

Some analysts say the central bank could be forced to cut its rosy inflation forecasts again when it conducts a quarterly review of its projections at a monetary policy meeting on April 26-27. (Reporting by Leika Kihara Editing by Eric Meijer)