* April factory output growth misses forecasts
* Surprising spurt in retail sales despite deflation
* Analysts say economy has bottomed out, recovery to be bumpy
By Lan Wang and Simon Rabinovitch
BEIJING, May 13 (Reuters) - China's factory output growth slowed in April, providing fresh evidence a day after poor export data that recovery in the world's third-largest economy is not yet on a rock-solid footing.
But retail sales surprisingly accelerated, offering encouragement to policymakers that consumers are helping to compensate for weakness in the industrial sector.
The reports completed a mixed bag of April data that had something for everyone.
Optimists cited strong lending and investment figures to maintain that the government's target of 8 percent growth in gross domestic product this year is within reach, while pessimists pointed to the still-fragile manufacturing sector to argue that China is not out of the woods yet.
"It is important not to attach too much importance to one particular data point and to recognise that any recovery in China is not going to proceed in a straight line," said Brian Jackson, an economist with Royal Bank of Canada in Hong Kong.
"Policy stimulus is having an impact on domestic demand, but weak external demand is still dragging down overall growth," he said.
Growth in factory output slowed to 7.3 percent in the 12 months to April, below analysts' forecasts of a rise of 8.3 percent, which was also the reading in March.
The moderation chimed with a larger than expected 22.6 percent drop in China's exports last month and suggested factories may have jumped the gun in March by ramping up output and adding to inventories in expectation of orders that did not fully materialise.
But Zhu Baoliang, deputy director of economic forecasting at the State Information Centre, a government think-tank, called the rise of 7.3 percent "okay" and said it was no cause for concern.
"It means the manufacturing industry is still on the path of recovery. Industrial production is stabilising, but we may also see some short-term fluctuations due to inventory adjustments," Zhu said.
The Shanghai stock market decided it liked the figures. The main index <.SSEC> was up 1.8 percent just before the close.
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For graphics of the data, click on http://graphics.thomsonreuters.com/059/CN_INDOUT0509.jpg http://graphics.thomsonreuters.com/059/CN_RTLSLS0509.jpg
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REGIONAL SPLIT
Factory output growth is well up from the record low pace of 3.8 percent in the first two months of the year and is running above the 5.1 percent average for the first quarter, noted Xing Zhiqiang with China International Capital Corp (CICC) in Beijing.
"So, we can conclude that the economy is bottoming out," Xing said.
Economists expected output to gather momentum as the government's 4 trillion yuan ($585 billion) stimulus plan, which is concentrated on infrastructure projects, moves into top gear.
Capital spending surged 30.5 percent in the first four months, the government reported on Tuesday, and banks calculated that the growth rate in April alone was almost 34 percent.
Mingchun Sun with Nomura in Hong Kong expects a renewed uptrend in factory output as early as this month.
"In fact, the OECD leading index for China -- which has a six-month lead over industrial production growth -- has already turned up sharply since January, suggesting a strong rebound in industrial production growth around May or June," he said.
A breakdown of April's data showed that export-oriented factories clustered on China's seaboard fared much worse than those inland, where the main focus is on the domestic market.
Output growth in western China last month was almost twice as strong as in the east of the country, a trend the government is keen to promote to help narrow regional inequalities.
CONSUMERS IN HIGH SPIRITS
Policymakers, who are just as eager to rebalance the economy away from exports and towards consumption, will also take heart from a pick-up in annual retail sales growth to 14.8 percent in April from 14.7 percent in March.
The increase, which beat forecasts of a 14.4 percent rise, was especially impressive because consumer prices fell at a quicker pace last month, deflating the nominal sales figures.
Economists were wary of reading too much into the retail sales figures, which includes purchases by the government as well as households.
But together with record car sales in April and a modest recovery in the long-depressed property market, the report suggests that household consumption, which makes up a puny 36 percent of GDP, is holding up well despite widespread job losses.
The government estimates that 23 million migrant workers alone have been let go during the downturn.
Banks variously calculated that, adjusted for inflation, retail sales grew between 16.5 percent and 17 percent in the 12 months to April.
Subsidies for buyers of small cars and tax rebates for rural Chinese who buy electrical appliances have given an extra boost to sales in recent weeks, but economists say the main driving force is continued income growth.
Urban incomes per head, after inflation, were up 11.2 percent in the first quarter. (Additional reporting by Zhou Xin and Langi Chiang; Writing by Alan Wheatley; Editing by Ken Wills & Kim Coghill)