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UPDATE 1-German inflation rate drops sharply below ECB target in May

(Adds analysts, background)

BERLIN, May 31 (Reuters) - German annual inflation eased sharply in May after exceeding the European Central Bank's target level in the previous month for the first time since November, preliminary data showed on Friday.

Analysts said the drop to the lowest level since Feb. 2018 was expected given that the sharp rise last month was the result of special effects like the Easter holiday falling later in April this year than last, driving up the cost of package holidays.

German consumer prices, harmonised to make them comparable with inflation data from other European Union countries, rose by 1.3% year-on-year after an increase of 2.1% in the previous month, the Federal Statistics Office said.

"The fall in the inflation rate is above all the result of a statistical effect as Easter was later," VP Bank Group Chief Economist Thomas Gitzel wrote in a note. "The rate seen in April was an outlier."

The May reading was the lowest since February 2018 and compared with a Reuters forecast of 1.4%.

The ECB targets inflation of close to but below 2% for the euro zone as a whole.

On the month, EU-harmonised prices rose by 0.3%, in line with market expectations.

Sebastian Wanke of KfW Bank said the ECB target-exceeding rate in April is unlikely to repeat itself this year given the German economy is slowing down as trade disputes and the prospect of Britain leaving the European Union without a deal weigh on it export-dependent manufacturers.

"And in this respect, we depend on the development of the trade disputes and the Brexit confusion - both are now weighing like a stone on the mood of internationally operating companies," Wanke said.

"This illustrates the full extent of the ECB's current dilemma. In any case, with such poor inflation prospects for Germany, the largest economy in the euro zone, key interest rates are not likely to be hiked in the foreseeable future."

The ECB faces the challenge of a weakening euro zone economy, where growth started to slow just after it ended its massive bond purchase programme in December.

(Reporting by Joseph Nasr Editing by Paul Carrel and Raissa Kasolowsky)