UPDATE 1-German industrial output slumps as protectionism angst grows

* Surprise fall is biggest in more than two years

* Confounds expectations for a small rise

* German industry risks harm in China-U.S. trade crossfire (Adds chambers of commerce, detail, background)

BERLIN, April 6 (Reuters) - German industrial output fell by the most in more than two years in February and the sector is losing momentum, the Economy Ministry said, as factories in Europe's largest economy throttle back in the face of the rising threat of protectionism.

Output fell by 1.6 percent after rising by a revised 0.1 percent in January, data from the Economy Ministry showed. February's drop was the biggest since August 2015 and compared with a Reuters consensus forecast for a rise of 0.3 percent.

A breakdown of the data showed a big slump in the production of capital goods, down 3.1 percent on the month, with output of consumer goods falling 1.5 percent and intermediate goods down 0.7 percent. Construction activity was also weaker overall.

UniCredit economist Andreas Rees said the weakness across industries suggested a wave of flu might have hit production. The ministry said industry was losing some of its drive.

"Industrial production has lost momentum. However, the good orders situation and the positive mood among companies suggest the industrial sector will remain on an upward path," the ministry said in a statement. "Growth momentum is nonetheless likely to be weaker than in the previous year."

Official data released on Thursday showed industrial orders rose less than expected in February because of weak domestic demand.

The DIHK Chambers of Commerce and Industry struck a cautionary note, saying escalation of a dispute between China and the United States over import duties could harm the global economy and weaken demand for German goods and services.

"On the demand side, the main question is how the current trade conflict develops," said Sophia Krietenbrink at the DIHK.

"If the duties cut or hinder global value chains, this could also affect the sales opportunities of German companies in the medium term," she said.

German carmakers BMW and Daimler are under increasing pressure to shift production of their sports utility vehicles out of the United States as a result of Washington's tensions with China.

In March, German business confidence deteriorated for a second straight month, dropping to its lowest level in nearly a year, as managers in Europe's largest economy became more concerned about the rising threat of protectionism.

German Chancellor Angela Merkel will visit U.S. President Donald Trump on April 27, a senior U.S. official said on Thursday, as differences over trade and a nuclear deal with Iran cast a shadow over the transatlantic relationship.

Merkel's trip, three days after French president Emmanuel Macron's state visit to the U.S. capital, will come just before the expiry of an exemption for the European Union from U.S. import duties on steel and aluminum.

The visits will give the EU's two leading national leaders an opportunity to lobby for the bloc to be exempted permanently from the steel and aluminum tariffs. The tariffs are suspended for the EU until May 1. (Additional reporting by Rene Wagner, editing by Larry King)