(Recasts with economist comments)
By Jan Strupczewski
BRUSSELS, Feb 4 (Reuters) - Euro zone retail sales fell more than expected year-on-year in December while November turnover was revised down, boosting expectations that the fourth quarter of 2008 saw a sharp economic contraction as recession deepened.
Retail sales in December -- traditionally boosted by Christmas shopping sprees -- were unchanged against November and 1.6 percent lower than a year earlier, European Union statistics office Eurostat said on Wednesday.
Economists noted the monthly figure was better than the expected fall of 0.3 percent but said the annual decline, deeper than the forecast 1.5 percent fall, gave a better picture of the underlying trend than the volatile monthly data.
"It definitely means in the fourth quarter of 2008 we will have negative consumption growth, which is not too good for GDP overall," said Peter Vanden Houte, economist at ING.
"We will probably have one of the worst GDP figures since World War Two in the fourth quarter of 2008. We expect minus 1.4 percent quarter-on-quarter," he said.
Eurostat revised down its November sales data to a 0.1 percent monthly fall from the previously reported 0.6 percent rise, and to a 2.6 percent annual drop against the 1.5 percent fall reported previously.
The data boosted expectations that the European Central Bank would cut interest rates by 50 basis points to 1.5 percent in March after pausing in February. It has slashed rates by a total of 225 basis points to 2 percent since October.
"Together with ongoing markedly contracting services sector activity in January, weak euro zone retail sales in December reinforce belief that the ECB is likely to cut interest rates by a further 50 basis points ... in March," said Howard Archer, economist at IHS Global Insight.
A detailed breakdown of the data was not yet available, but Eurostat said food, drink and tobacco sales rose 0.2 percent month-on-month in December, while sales of non-food products fell 0.4 percent.
"We had hoped that sales volumes might pick up as inflation fell," said Jennifer McKeown, economist at Capital Economics.
"Instead, it so far appears that weak consumer confidence and a deteriorating labour market have simply led consumers to rein in the amount that they spend," she said.
Inflation in the euro zone fell to 1.6 percent year-on-year in December from 2.1 percent in November, mainly thanks to lower oil prices. It sank to 1.1 percent in January. Unemployment in December, however, hit 8 percent, its highest in two years.
Retail sales are an indication of household demand. Falling private consumption was one of the reasons for a shrinkage in the euro zone economy in the second and third quarters of 2008. (Additional reporting by Marcin Grajewski, Foo Yunchee and Sarah Luehrs; Editing by Dale Hudson)