UPDATE 2-Swedish Q1 GDP posts record fall but worst may be past

* Swedish Q1 GDP contracts record 6.5 pct year-on-year

* Annual GDP fall in line with market expectations

* Q1 GDP falls 0.9 pct vs Q4

(Adds analyst comment, background)

By Niklas Pollard

STOCKHOLM, May 29 (Reuters) - Sweden's economy contracted at a record annual pace of 6.5 percent in the first quarter, matching market expectations, as the global downturn pushed the Nordic country's economy deep into recession.

Quarter-on-quarter, the economy shrank 0.9 percent, the statistics office said in a statement on Friday.

The contraction was the worst since the statistics office began publishing seasonally adjusted quarterly data in 1993, eclipsing the previous record fall set in the fourth quarter.

The outcome matched median forecasts of a 6.5 percent drop year-on-year, in a Reuters poll of 20 economists.

"It was as expected, but that also reflects a kind of process of acclimatisation. If anyone had talked about a GDP drop of 6.5 percent during normal economic times, they wouldn't have been believed," Danske analyst Michael Bostrom said.

There was little market reaction to the figures.

Sweden was plunged into recession last year as the global financial crisis hammered demand for blue-chip manufacturers such as world number two truck maker Volvo and SKF , the world's top bearings maker.

The unemployment rate is seen surging well into double digits as firms scramble to cut costs, reaching levels last seen in the early 1990s when Sweden fell victim to a home-grown banking crisis.

THROUGH THE WORST?

GDP for the fourth quarter was revised down to show a quarterly decline of 5.0 percent compared with a previously reported 2.4 percent fall, statistics office said. This was due in part to a change in seasonal adjustment methodology.

"It probably shows that the bottom, in terms of momentum, was in the fourth quarter," Swedbank analyst Knut Hallberg said.

Tentative signs that the economy may be stabilising have emerged in recent weeks however, with consumer confidence coming off lows hit around the turn of the year while retail sales have shot up, spurred by an unprecedented string of rate cuts by the central bank.

The Riksbank has slashed its key repo rate by more than 4 percentage points since the financial crisis enveloped the world last year to put it at 0.5 percent.

"We see a relatively sharp pick-up in Sweden compared to other countries as consumers may have been overly pessimistic. We also have a weak Swedish crown which will support Swedish industry," RBS analyst Peter Kaplan said.

But risks that any recovery for the Swedish economy may be nipped in the bud remain.

Over the past week the crown has been hit by renewed worries that the crisis in the Baltic countries, whose economies are set to contract even more than Sweden's, could threaten some of the Nordic country's top banks.

Both Swedbank and SEB extended billions of crowns of loans in the region over years of strong growth, but now face mounting loan losses due to the precipitous downturn gripping Estonia, Latvia and Lithuania. (Editing by Mike Peacock) (Additional reporting by Mia Shanley, Victoria Klesty, Sven Nordenstam, Johan Ahlander and Love Liman)