UPDATE 1- Swedish economy slowing fast, rate cut seen

(Adds fresh analyst comment, market reaction)

STOCKHOLM, Oct 1 (Reuters) - Sweden's manufacturing sector shrank for a second month in September and by more than expected, data showed on Monday, pointing to a rapid slowdown in the economy and raising expectations for another interest rate cut this year.

Sweden started the year on a strong footing, but the euro zone crisis has cast a shadow over the Nordic economy, forcing the Riksbank to cut rates in early September.

The central bank said it now expected to remain on hold until the middle of next year, but a string of weak data and a persistently strong Swedish crown have convinced the market that at least one rate cut will be necessary this year.

"The further drop in PMI shows that the slowdown in global demand now weighs heavily on the manufacturing sector," Nordea Chief Analyst Torbjorn Isaksson said in a note.

"Today's figure supports our view of a more expansionary monetary policy and we stick to our call of a rate cut in December."

The seasonally adjusted purchasing managers' index for the manufacturing sector fell to 44.7 points in September, down from 45.1 points in August, da ta compilers Silf and Swedbank said on Monday. The reading was well below a forecast 46.5.

Any score below 50 signals a decline in business activity.

While the sub-index for orders rose to 42.1 points from 41.1 in the previous month, the sub-index for production fell to 43.9 points from 45.8 while the employment index dipped to 43.0 points from 45.1.

The manufacturing sector has contracted in four out of the last five months, according to SILF/Swedbank.

The Swedish crown weakened to around 8.439 to the euro from 8.426 before the data .

The Riksbank next meets to decide rates in late October and several analysts said it could be forced to ease policy then.

"Unfortunately, Sweden is going downhill rather quickly," Par Magnusson, economist at RBS. "This is really bad and strengthens our view that the Riksbank has to cut rates again in October."

The market is pricing in a 38 percent chance of a 25 basis points rate cut in October, according to Jussi Hiljanen, head of fixed income research at SEB. That was up from 36 percent after data last week showed an unexpected drop in retail sales in August.

The market sees a rate cut before the end of the year as a near certainty.

(Editing by Susan Fenton)

((simon.c.johnson@thomsonreuters.com)(+46 8 700 1045)(Reuters Messaging: simon.c.johnson.reuters.com@reuters.net))

Keywords: SWEDEN PMI/