* Consumer confidence falls to 60.2 from 70.0
* 'Fear factor' returns ahead of December budget
* Expectations index plummets to 48.6 from 61.0
DUBLIN, Oct 2 (Reuters) - Irish consumer confidence dropped sharply in September as the government began debating another austerity budget, knocking hopes that stabler state finances would help boost high street spending.
The KBC Ireland/ESRI Consumer Sentiment Index plunged to 60.2 in September from 70.0 in August.
The fall, the steepest since fears about the euro zone's future rattled consumers late last year, leaves the index at its lowest level since February.
With unemployment stuck among the highest in Europe at over 14 percent, Dublin needs to halt a four-year slide in domestic demand to help pull it out of its debt spiral.
Ireland has been buoyed in recent months by euro zone efforts to tackle the continent's debt crisis, which have helped cut its borrowing costs sharply and increased the chances it will emerge successfully from an EU-IMF bailout next year.
But media speculation about a new household tax and cuts to social security and health spending in December in what will be Ireland's sixth austerity budget have unnerved consumers, the survey's authors said.
"The September survey suggests the fear factor has returned as consumers worry about the possible impact of another severe budget on already strained household spending power," said KBC chief economist Austin Hughes.
"The improvement in confidence thus far in 2012 was tentative and fragile in nature... built largely on a gradual easing in concerns ... rather than any dramatically positive news."
But the fall likely overstated the change in the mood of consumers, he said.
Consumers' view of current economic conditions was subdued, falling to 77.6 from 83.2, while expectations plummeted to 48.6 in September from 61.0 in the previous month.
The fall in Irish consumer confidence also reflects slippage in euro zone consumer confidence, which fell in September as a result of government lay-offs, budget cuts, record joblessness and stubbornly high inflation pushed up by world oil prices.
(Reporting by Conor Humphries; Editing by John Stonestreet)
Keywords: IRELAND ECONOMY/SENTIMENT