UPDATE 1-India's industrial output growth rises in August, still weak

* Industrial output up 2.7 percent in August

* Government wants RBI to ease policy at Oct. 30 meeting

* CPI inflation slows to 9.73 pct in September

(Adds details, market reaction)

NEW DELHI, Oct 12 (Reuters) - India's industrial output rose modestly in August but not enough to end a long slump in Asia's third largest economy, while inflation slowed, improving the case for a cut in interest rates that both businessmen and politicians have been pleading for.

Data released by the Central Statistics Office (CSO) on Friday showed output at factories, mines and utilities rose an annual 2.7 percent, with the growth driven by consumer goods. That was higher th a n a forecast of 1.1 percent in a Reuters poll and even beat the most optimistic forecast.

Manufacturing, which accounts for the bulk of industrial production and contributes about 15 percent to overall GDP, rose 2.9 percent in August from a year ago.

India has a long way to go before it bounces back to the stellar growth rates of the past, having slid since February into a phase of stagnation that has become the worst since the depths of a global crisis three years ago.

The government and businessmen are pleading with the Reserve Bank of India (RBI) to lower rates, which are the highest among the major economies, at its next quarterly policy review on Oct. 30.

But many economists believe it will stick to its guns until more action is taken to control government spending and lower inflation.

"We would be cautious in saying this marks a revival in growth. Unless the impediments to investment are removed, there is unlikely to be a significant turnaround in the near future," said Jyotinder Kaur, economist at HDFC bank in New Delhi.

"From the central bank's policy point of view, the headline inflation number remains crucial, and the factory output print coming a little higher than expected is not going to make a big difference."

India's annual consumer price inflation fell in September to 9.73 percent from 10.03 percent in August, driven by a marginal fall in fuel and food prices, data showed on Friday. The more widely-watched wholesale price index numbers are released on Monday.

A Reuters poll this week forecast headline WPI inflation accelerating to 7.7 percent in September after the government cut fuel subsidies to tackle the deficit.

A slew of economic reforms in recent weeks was partly aimed at convincing the central bank to ease monetary policy.

<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ INSTANT VIEW-Analysts' reaction: GRAPHIC-IIP, exports: TABLE-August output data: POLL-Worst may be over - if reforms stick ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

Indian markets showed muted reaction to the data. The 10-year bond yields briefly fell, but then recovered to 8.17 percent, the rupee weakened slightly to 52.75 from 52.70 before the data, while the BSE index

was still slightly lower.

Both the 1-year and 5-year swap rates edged down 1 basis point each to 7.60 and 6.99 percent respectively.

(Reporting by Manoj Kumar; Editing by Simon Cameron-Moore)

((manoj.kumar@thomsonreuters.com)(+91 11 4178 1012)(Reuters Messaging: manoj.kumar.thomsonreuters.com@reuters.net))