(Recasts with economists' comments)
By Jan Strupczewski
BRUSSELS, May 5 (Reuters) - Euro zone retail sales fell short of market expectations in March on a month-on-month basis signalling continued weakness in consumer demand that is likely to leave exports as the main growth engine.
European Union statistics office Eurostat said retail sales in the 16 countries using the euro were flat month-on-month in March and 0.1 percent lower than in the same period of 2009.
Economists polled by Reuters had on average expected a 0.2 percent monthly increase and a 0.5 percent year-on-year fall.
"It means private consumption is still not a driver of the recovery. It means we will have to stick to export-driven recovery for a while," said Carsten Brzeski, economist at ING.
The European Commission forecast on Wednesday that euro zone growth would be stronger than previously forecast this year at 0.9 percent rather than 0.7 percent expected in February, mainly thanks to stronger external demand for euro zone exports.
The Commission estimated that euro zone economic growth in the first quarter of 2010 was 0.1 percent quarter on quarter and that it would be 0.4 percent in the second quarter.
It is then likely to slow down to 0.2 percent quarter-on-quarter the third quarter and accelerate to 0.3 percent in the last three months of 2010, the Commission said.
Consumer demand is weak because unemployment in the euro zone is at an 11-year high of 10 percent and expected to rise further, which keeps a lid on wage growth and limits households' spending power.
This also reduces inflationary risks in the economy.
The European Central Bank, which wants to keep inflation below but close to 2 percent, meets on interest rates on Thursday amid strong market expectations that it will keep interest rats at record lows of 1 percent.
"There remains a compelling case for the ECB to keep interest rates down at 1.00 percent not only at its May policy meeting on Thursday but also for many more months to come," said Howard Archer, economist at IHS Global Insight.
"We expect the ECB to hold off from raising interest rates until 2011 and to tread very lightly over the coming months in withdrawing its emergency liquidity measures," he said.
The European Commission forecast that euro zone inflation would be 1.5 percent this year and 1.7 percent in 2011.
(Reporting by Jan Strupczewski, editing by Dale Hudson and Tony Austin)