(Adds economists' comments)
By Jan Strupczewski
BRUSSELS, July 14 (Reuters) - Euro zone industrial output rose month-on-month in May for the first time since August 2008 and even though the gain fell short of market expectations, it added to signs that the recession may be bottoming out.
Industrial production in the 16-country euro area increased 0.5 percent on the month but fell 17.0 percent year-on-year, the European Union's statistics office said on Tuesday.
Rising output of intermediate, capital and non-durable consumer goods boosted the monthly result.
However, the increase compared with April came in below the expectations of economists polled by Reuters, who had forecast a 1.2 percent monthly gain and a 17.7 percent annual fall.
"It is weaker than expected. But nevertheless (the increase) is a good sign. The industry is on the way to stabilisation," said Juergen Michels, economist at Citigroup.
Eurostat revised upwards its production data for April to a monthly contraction of 1.4 percent from the previously reported fall of 1.9 percent, and to a year-on-year drop of 20.5 percent versus the initially reported 21.6 percent decline.
"I think in the coming months, we will see more positives for output rather than negatives and there's a fighting chance industrial production will expand in Q3 overall, opening the door for a positive change in GDP," said Ken Wattret, economist at BNP Paribas.
"However, we see this as a technical rebound in the industrial sector, and the underlying condition of the euro zone economy remains very fragile," he said.
Industrial production accounts for roughly 17 percent of euro zone gross domestic product, and the May data could mean the economic contraction in the second quarter was likely to be smaller than in the first.
The euro zone economy shrank by a record 2.5 percent on a quarterly basis in the first three months of 2009, and the European Commission expects it to have contracted by 0.6 percent in the second quarter.
STRONGER ORDERS NEEDED
But economists cautioned that the rise in production could be related mainly to a deep depletion of stocks in previous months and that stronger orders were needed for the recovery to take hold.
"It is premature at this stage to deduce anything more than the euro zone manufacturing sector is experiencing a bounce, after an extended very sharp contraction, as it benefits from the major de-stocking that has now occurred," said Howard Archer, economist at IHS Global Insight.
"For significant, sustainable manufacturing recovery to develop, there needs to be an extended pick-up in orders in both domestic and foreign markets and this currently remains highly uncertain," he said. (Editing by Dale Hudson)