UPDATE 1-Japan machinery orders slide more than expected, China risk looms

(Adds analyst's quote, graphic link, details)

* Aug machinery orders -3.3 pct vs f'cast -2.5 pct

* Govt maintains view on machinery orders

* Analysts warn of murky economic outlook

By Kaori Kaneko

TOKYO, Oct 11 (Reuters) - Japan's core machinery orders fell more than expected in August after two straight months of gains, a sign that Europe's debt crisis and weakening exports to China are beginning to sap corporate appetite to spend.

The data bodes ill for the world's third-largest economy, which has been relying on resilience in private consumption and capital expenditure to support growth even as the global slowdown hurts exports.

Weakness in corporate capital spending adds pressure on the Bank of Japan to ease monetary policy again at its next policy-setting meeting on Oct. 30, when it is set to cut its long-term economic forecasts and admit that it may be several more years before the central bank's target of 1 percent inflation can materialise.

Japan's capital spending has been lacking momentum as companies put off business expenditures because of uncertainty over global growth prospects, while the BOJ's key tankan survey showed this month big firms expect capital expenditure to rise 6.4 percent in the year to next March.

A dispute with China over sovereignty of some islands is adding to concerns about the outlook for Japanese corporate activity and exports to China, analysts said.

"Manufacturing sectors including steel and transport dragged down the core orders, and companies are likely to delay capital spending further with overseas economies showing no signs of bottoming out," said Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo.

"The biggest risk is a slowdown in China, and the territorial dispute has prompted a sharp drop in demand for Japanese products there, raising concerns for Japanese firms. As such, the Bank of Japan may further cut its economic assessment and ease monetary policy further as early as this month if weak economic indicators persist."


Graphic on machine machinery orders:


Core machinery orders, a highly volatile series regarded as an indicator of capital spending in the coming six to nine months, fell 3.3 percent in August, bigger than the median forecast for a 2.5 percent decline in a Reuters poll and followed a 4.6 percent gain in July.

Compared with a year earlier, core orders, a highly volatile data series regarded as an indicator of capital spending in the coming six to nine months, dropped 6.1 percent in August, data from the Cabinet Office showed on Thursday.

The Cabinet Office, which compiles the data series, kept its assessment of machinery orders, saying that they are seesawing.

Japan's economy has outperformed most of its peers in the Group of Seven on spending for rebuilding from last year's earthquake. But with that effect fading, domestic demand may not make up for falling exports for much longer, analysts say.

Adding to concerns for the export-reliant economy, the International Monetary Fund said on Tuesday China's economic growth was expected to weaken to 7.8 percent this year as it warned of risks to emerging Asia if the euro zone crisis worsens and the United States does not avoid its "fiscal cliff".

Japanese factory output fell to a 15-month low in August on sagging sales to top export market China and business sentiment soured in the three months to September, fuelling concerns that the economy has stalled and may slip into recession.

That has kept the BOJ under pressure for further stimulus, despite loosening monetary policy last month to prevent weakening exports from derailing a fragile economic recovery. The central bank kept monetary policy on hold last week, but analysts see a good chance of further easing at another rate review scheduled on Oct. 30.

(Writing by Tetsushi Kajimoto)