UPDATE 2-Spain's economic output eases in 2018, deficit drops below 3 pct

* Spain's GDP grows 2.6 pct in 2018 y/y - INE

* Budget deficit drops to 2.6 pct of GDP in 2018

* Public debt inches lower to 97.2 pct - C.Bank (Adds deficit, debt)

MADRID, March 29 (Reuters) - The Spanish economy expanded at the slowest pace last year since 2014 while the budget deficit slipped below the Brussels-set target of 3 percent of gross domestic product for the first time since the 2008 financial crisis, data showed on Friday.

While a weaker global economy weighed on Spanish exports at the end of last year, the economy has mostly resisted a slowdown across Europe's larger economies as private consumption and public spending helped offset weaker external demand.

The economy grew by 2.6 percent in 2018 from a year earlier after expanding 3.0 percent in 2017, while output rose by 0.6 percent in the fourth quarter, below the preliminary figure of 0.7 percent, the National Statistics Institute (INE) said.

Gross domestic product expanded 2.3 percent in the October to December period from a year earlier, the lowest annual growth for a single quarter since the end of 2014, INE figures showed.

The fourth quarter growth figure saw a positive contribution from domestic demand of 2.5 percentage points but external demand cut that by 0.2 percentage points, INE said.

DEFLATING DEFICIT

The figures also showed Spain emerged from the EU-set excessive deficit procedure last year after the public budget shortfall was cut to 2.6 percent of GDP, the lowest since before the start of the five-year economic slump that began in 2008.

Spain fell into an almost five-year recession after the burst of a property bubble sent shock waves through the economy. Since 2013 it has returned to growth and economic output has outpaced much of the rest of Europe.

However, Spain was forced in to a long period of spending cuts and tax hikes to battle a budget deficit that ballooned to over 11 percent on the back of the crisis, sparking market concerns that the country was unable to control its finances.

The Bank of Spain has predicted growth of 0.6 percent quarter on quarter in the January to March period, but has forecast a slowdown through this year to end 2019 with annual growth of 2.2 percent.

INE also revised the figures for the third quarter, cutting the quarterly growth to 0.5 percent, from 0.6 percent recorded previously, and raising third quarter year-on-year growth to 2.5 percent from a previously reported 2.4 percent.

Separately, public debt fell to 97.2 percent of GDP at the end of last year, the Bank of Spain said on Friday, slightly above forecasts and a long way from the 38 percent of GDP registered before the onset of the financial crisis. (Joao Manuel Mauricio in Gdynia Editing by Paul Day, Alison Williams and Frances Kerry)