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UPDATE 1-Euro zone growth halves, inflation slows in spur for ECB

Jan Strupczewski and Philip Blenkinsop

(Recasts with economists' comments, graph)

BRUSSELS, July 31 (Reuters) - Euro zone economic growth halved in the second quarter and inflation slowed sharply in July, reinforcing market expectations that the European Central Bank will further ease monetary policy in September.

The European Union's statistics office said on Wednesday that gross domestic product in the 19 countries sharing the euro grew 0.2% quarter-on-quarter in the April-June period, down from 0.4% in the previous three months and returning to the anaemic rates seen in the third and fourth quarters of last year.

Inflation, which the ECB wants to keep below, but close to, 2%, also slowed to 1.1% year-on-year in July from 1.3% in June - the lowest reading in 17 months. (For a graph see: https://tmsnrt.rs/2OxUaZa)

"We expect the ECB to respond to this broad-based economic weakness which we think is likely to continue with a round of extra policy easing, including restarting QE and cutting rates," said Daniele Antonucci, economist at Morgan Stanley.

Core inflation, which strips out volatile unprocessed food and energy and which the ECB scrutinises in policy decisions, also fell to 1.1% in July from 1.3% in June.

The even more narrow measure excluding also alcohol and tobacco prices that many market economists look at was down to 0.9% from 1.1%, strengthening the case for a package of ECB measures to support the economy and faster inflation.

"The ECB more or less announced what it will do - cutting rates, probably restarting QE and putting in place the tiering system for the banks," said Peter Vanden Houte, chief economist at ING.

"The big question is if all of this will have much of an impact on both inflation and growth as we are starting to get to the limits. Now it's up to governments with more pro-active fiscal policy to step in as the ECB cannot do it alone."

The slower price growth comes even though the unemployment rate fell to 7.5% of the workforce, its lowest in 11 years, data showed.

Antonucci said the inflation and growth data, with downside risks for both, provided clear grounds for the ECB to push though a new package of measures as soon as September. The ECB's Governing Council holds its next monetary policy meeting on Sept. 12.

"That's likely to include a 10 basis point deposit rate cut to -0.50%, plus an announcement or a strong hint that the central bank will restart net asset purchases," he said.

(Reporting by Jan Strupczewski Editing by Philip Blenkinsop/Mark Heinrich)