* Inflation fell to 0.7 percent in February
* Lowest level since 1969
* Some analysts see risk of falling prices later this year
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By Jason Webb
MADRID, Feb 27 (Reuters) - Spanish annual inflation fell to 0.7 percent in February, its lowest level since June 1969 as the recession saps demand for goods, preliminary European-harmonised data showed on Friday.
The result announced by the National Statistics Institute was lower than analysts' expectations in a Reuters survey, which had predicted inflation to hold steady at the 0.8 percent level recorded in January.
The Spanish data will reinforce expectations of a fall in inflation across the euro zone, where data due on Monday is expected to show a reduction to 1.0 percent from an estimated 1.1 percent in January. But Spain's performance contrasted with slightly higher-than-expected February inflation data in Germany.
Despite the expectation of lower euro zone inflation, a Reuters forecast showed analysts expecting the European Central Bank to cut its main lending rate at its next meeting on March 5 by 50 basis points to 1.5 percent.
Some analysts believe recessionary forces will drag Spain into a period of falling prices, something which the government says will be avoided.
"Now the key thing is to find out what underlying inflation was, as that's going to tell us if this reduction in the rate of growth in prices is going to lead to a process of deflation. The rate is going to continue falling over the next few months until it reaches negative levels," said Nicolas Lopez of M&G Valores.
Full, revised inflation data will be announced on March 12.
Spanish inflation has fallen every month since last July, when it hit 5.3 percent, which was a record high for the European-harmonised series which began in 1997.
Spain's economy contracted by 1 percent in the fourth quarter of last year, its second consecutive quarter of decline as the disappearance of credit from world markets strangled consumption and choked off the property market, which had fuelled a decade-long boom.
While Spain's rate of contraction was less than seen in more export-oriented economies such as Germany, this was largely due to a steep fall in imports cutting the negative contribution of trade to the Spanish economy.
Spain's imports sank by 16.4 percent in December, as shoppers lost heart and oil prices fell, Bank of Spain data showed on Friday.
Unemployment has almost doubled since 2007 to 14 percent and retail sales slumped by 6.1 percent in December.
Economists fear Spain could face a long period of low growth as it works off private sector debt and tries to restore competitiveness after years in which its inflation rate outpaced the euro zone average.
"For several years you should see lower growth and lower inflation than average in Spain," said Giovanni Zanni of Credit Suisse.
"There is a kind of cycle in a monetary union which is driven by price competitiveness," Zanni said.
"So Germany for now has done the low growth, low inflation bit, whereas Spain was on the opposite side of the story and I guess that we are in for the reversal of that." (Reporting by Jason Webb; Additional reporting by Manuel Maria Ruiz and Ben Harding)