* Euro zone consumer prices seen dropping in June, July
* Risk of deflation seen small but not negligible
* New ECB steps seen unlikely unless recession worsens
By Jan Strupczewski
BRUSSELS, May 29 (Reuters) - Prices stopped growing year-on-year in the euro zone in May for the first time and economists expect them to fall in June and July, posing a risk of deflation that could damage economic recovery.
Consumer prices were flat year-on-year in the 16-country euro area this month after increases of 0.6 percent in March and April, the European Union's statistics office said on Friday.
Economists in a Reuters poll published on May 22 had expected prices this month to rise by 0.2 percent.
"The figure shows that the risk of deflation in the euro area is not negligible," said Juergen Michels, economist at Citigroup.
But European Economic and Monetary Affairs Commissioner Joaquin Almunia, speaking in Spain, played down deflation risks.
"In the second half of the year base effects are going to tend to push the inflation curve upwards. I don't see any risk at all of deflation in the euro zone," Almunia told reporters.
The Eurostat estimate gave no monthly figure or a more detailed breakdown, but economists expected inflation to have slowed because oil and food was less expensive than a year ago.
BNP Paribas economist Eoin O'Callaghan expects prices to fall 0.3 percent year-on-year in June and 0.7 percent in July.
The European Central Bank wants annual price gains to be just below 2 percent over the medium term to avoid deflation, which it defines as a prolonged and widespread decline in prices coupled with consumers' expectations of further falls.
ECB STRUGGLE
ECB President Jean-Claude Trichet, speaking in Marrakech, Morocco, said long-term inflation expectations were well anchored at the bank's price stability target.
Economists, though, said the ECB faced a struggle for price growth to come closer to its goal.
"While the downside risk of prolonged deflation is still unlikely, we are increasingly convinced that the ECB could have a fight on its hands to get inflation back near 2 percent next year," said Colin Ellis, economist at Daiwa Securities.
Prices in May stopped growing in Germany, the euro zone's biggest economy, turned negative in Belgium for the first time since 1960 and fell for the second month in a row in Spain.
The ECB expects prices to fall for a few months in mid-year because of comparison effects with record high oil and food costs the year before, but says price growth will resume later.
It has said that it therefore does not expect deflation.
"The likelihood of deflation, in the sense of a protracted decline in the general price level, now appears slight," ECB Governing Council member Mario Draghi said in Rome.
But economists said such a risk was growing.
"With spare capacity rocketing and the slowing labour market set to place downward pressure on wage growth, the chances of a more prolonged and damaging period of deflation appear to be growing," said Ben May, economist at Capital Economics.
The data boosted bond market sentiment and bond prices. Market participants said the market was so far not taking into account the risk of deflation, with two-year breakeven rates -- the yield gap between two-year inflation-linked bonds over equivalent nominal government debt -- near 2 percent.
The ECB has lowered its main refinancing rate to a record low of 1 percent to boost credit and consumption and announced it would buy 60 billion euros ($84 billion) of corporate debt.
Economists said that unless clear signs emerged that the economic downturn was gathering pace again, the bank was unlikely to launch further measures to support the economy. (Additional reporting by Andrew Hay in Spain, Marcin Grajewski in Brussels, Stephen Brown in Rome and Lamine Ghanmi in Morocco; Editing by Dale Hudson)