(Adds analyst comment; high street quote)
By Paul Day
MADRID, Nov 12 (Reuters) - Spain's annual inflation dropped almost a full percentage point to 3.6 percent in October, the lowest level in a year as energy and food costs fell and the real economy slowed, government data showed on Wednesday.
The figure, in line with estimates, was down from 4.5 percent in September, and took the overspill in Spanish EU-harmonised price growth compared to the euro zone to a more than four-year low.
"It's reassuring because this figure shows there's no drift comparative with the euro zone, which has been a worry. Spain is clearly in the club," said economist Gilles Moec at Bank of America.
Analysts polled by Reuters expect data on Friday to confirm euro zone inflation at 3.2 percent in October, with markets also eyeing the Spanish numbers, and Germany's tomorrow, for a sign on the bloc's figures.
Spain's Economy Secretary David Vegara said annual price growth should fall below 3 percent by the end of 2008 and added that energy and food costs had driven most of the decline up till now.
"Part of it can be explained by the economic slowdown, but practically all of the fall is due to the reduction in the energy component and stabilization or a small fall in the food component," Vegara said during a press conference.
FALLING EXPECTATIONS
BBVA chief economist Jose Luis Escriva said he expects Spanish inflation to be more in line with the euro zone's price target of 2 percent or below in 2009.
"Inflation has fallen 1.7 percent in just three months and our forecast is an average of 2.3 percent in 2009," Escriva said.
Lombard Street Research economist Diana Choyleva saw the data as encouraging.
"(October's figure) reduces the risk, which (Spain) was running until recently, of spiralling inflation on the back of indexation of wages," Choyleva said.
Inflation in Spain hit a 15-year high in July fuelling fears wages would follow suit and further dent wage competiveness with other euro zone economies.
Strong economic growth in the last decade has largely come from the construction and property sectors, but a deep housing slump will force the country's industrial base to diversify.
The Spanish economy contracted for the first time in 15 years in the third quarter, shrinking around 0.2 percent from a quarter earlier, Vegara said ahead of preliminary growth data on Friday.
The European Commission says Spain's economy will contract until the second quarter of next year.
Reflecting that was Spanish core inflation, excluding volatile energy and fresh food components, which fell to 2.9 percent in October from 3.4 percent a month earlier.
"The most interesting thing is the substantial drop in core inflation, which is a very clear sign of a more fundamental slowdown in the overall economy," said Daniel Antonucci, economist at Merrill Lynch.
The headline figure reflected moderate gains in food components compared to steep rises at the end of last year which has already filtered through to the high street.
"Our prices rose very quickly last year and that hit all of our customers, but our produce prices haven't risen at all in the last few months," said Julia Exposito, 50, the owner of a fruit and vegetable stall in central Madrid.
(Additional reporting by Andrew Hay; Editing by Patrick Graham and Victoria Main)