* Producer prices rise 1.3 pct in Q4, above forecasts
* But domestic prices show first drop in a decade
* NAB business conditions index improves to -6 in Dec
* Business confidence index bounces to -20, from record low
By Wayne Cole
SYDNEY, Jan 27 (Reuters) - Australia's producer prices rose by more than expected last quarter as a slump in the Australian dollar sent import costs surging, but signs of easing inflationary pressures at home kept the door open for more rate cuts.
A separate survey of businesses out on Tuesday showed a surprising rebound in activity in December thanks to government pump-priming efforts, arguing for further fiscal help as well.
"It shows that fiscal stimulus proved effective in December and adds to the case for more, probably sooner rather than later," said Brian Redican, a senior economist at Macquarie. "And we're still on course for another rate cut next week."
The Reserve Bank of Australia (RBA) holds its monthly policy meeting on Feb. 3 and investors are counting on a cut of at least 75 basis points in the 4.25 percent cash rate.
The central bank has already slashed rates by 3 percentage points since September in a desperate effort to cushion the country from a world recession.
"The RBA's very much focused on the deteriorating outlook for the global economy, and we continue to revise down our global growth forecasts," said Helen Kevans, an economist at JPMorgan.
"So we'll probably see a 100 basis-point cut next week."
Indeed, analysts argued that the jump in import prices seen last quarter augured ill for company profit margins and actually reinforced the case for more policy easing.
Overall, prices at the final stage of production (PPI) increased by 1.3 percent in the fourth quarter, well above forecasts of a 0.1 percent rise.
That was entirely driven by a 14.8 percent rise in import prices, which in turn reflected weakness in the Australian dollar which fell by 25 percent between July and December in trade weighted terms.
DOMESTIC DISINFLATION
In fact, domestic prices took a rare 0.5 percent dip in the fourth quarter, the first drop in a decade, with housing construction costs notably weak.
That added to expectations the government's index of consumer prices (CPI), due on Wednesday, would show a drop of around 0.4 percent in the fourth quarter, the largest since 1997.
Annual inflation is seen slowing to around 3.6 percent, from 5 percent in the third quarter, and could well re-enter the central bank's 2 to 3 percent target band this quarter. Meanwhile, a monthly survey of over 400 firms from National Australia Bank showed that over A$8 billion ($5.3 billion) of one-off government payments led to a Christmas windfall for retailers.
As a result, the survey's main index of business conditions bounced by 11 points in December to -6 points, so recovering much of the steep 17 point-slide suffered over October and November.
Likewise, its measure of business confidence rose 10 points from November's record low to stand at -20 in December.
"It's evidence that the government's fiscal spending initiatives improved conditions and confidence, with the largest bounces in retail, wholesale and the discretionary spending," said Alan Oster, group chief economist at NAB.
Yet there were also plenty of signs of weakness in the survey with export orders slumping, firms slashing investment plans and jobs being shed at a pace not seen since the recession of the early 1990s.
"The survey is indicative of a serious deterioration in the labour market in the not too distant future," warned Oster.
Oster said that, based on historical relationships, the unemployment rate could well rise to over 6 percent this year, from 4.5 percent at end 2008.
Official figures on employment for January are due next week and the survey will stoke fears of a sizable fall in jobs. ($1=1.52 Australian Dollar) (Editing by Jan Dahinten)