* CPI falls 1.7 pct year-on-year
* HICP rises at slowest pace on record
(Adds analyst comment, detail)
By Jonathan Saul
DUBLIN, March 12 (Reuters) - Consumer prices in Ireland fell at their fastest pace in nearly half a century last month due to a deepening recession, lower energy prices and cheaper mortgages.
Economists hoped that falling prices will help boost disposable income and buoy competitiveness as the former "Celtic Tiger" faces its worst recession on record this year.
Ireland's consumer price index (CPI) fell by 0.4 percent in February, leading to an annual drop of 1.7 percent, the biggest since February 1960, the Central Statistics Office said on Thursday.
February's data compared with an annual drop of 0.1 percent the month before, which had been the lowest since May 1960, and a median forecast for a 1.1 percent fall in a Reuters poll.
"The only bit of good news on the Irish economic front at the moment continues to be the sharp fall in prices," said Bloxham chief economist Alan McQuaid.
The bursting of Ireland's property bubble and global turmoil have battered prospects for Ireland's open economy.
"If negative inflation remains located in those economies with the greatest need to adjust right now such as Ireland ... it will be a very positive development, providing a competitiveness fillip for the Irish economy," said National Irish Bank chief economist Ronnie O'Toole.
Interest rate cuts, which have led to lower mortgage rates, as well as falling fuel prices were the main drivers of February's drop. Clothing and footwear prices also fell reflecting the slowing pace of consumer spending.
"Although deflation has taken hold for the time being, and the headline CPI could fall by as much as 3.0 percent on average in 2009, we don't see it becoming deeply embedded in the financial, economic system as it has done in Japan," said Bloxham's McQuaid.
The Harmonised Index of Consumer prices (HICP), which is used for European Union-wide comparisons, rose 0.2 percent on the month and was up 0.1 percent year-on-year, recording the slowest ever year-on-year increase in the series, the CSO said.
Ulster Bank chief economist Pat McArdle said the drop in the CPI was driven by interest rate cuts and was not sufficient to be considered deflationary.
"But the HICP, which is due to go negative shortly, would be a better gauge. We now see the HICP averaging -1.0 percent this year," he said.
"With house prices and other prices falling that is much closer to what we call a deflationary environment."
Economists expect the CPI to average -2.8 percent this year with the HICP at +0.4 percent, the Reuters poll showed. (Editing by Toby Chopra)