* BoE's growth forecasts look optimistic relative to others
* Governor King says main worry is global economy
* Inflation stands in way of further policy action for now
By Matt Falloon
LONDON, Dec 1 (Reuters) - The Bank of England is in danger of overestimating the strength of Britain's recovery, raising the chances it will have to inject more stimulus to counter the shock waves from Europe's debt crisis and the UK fiscal squeeze.
Britain's economy has bounced back surprisingly well from an 18-month recession and inflation has held well above the central bank's two percent target this year, forcing many investors to take bets on further quantitative easing off the table.
A Reuters poll on Wednesday showed only a third of analysts think the BoE will restart its asset purchase scheme [ID:nLDE6AT1WQ] and a key manufacturing survey put activity at a six-year high and jobs growth at a record pace this month.
But the Irish crisis, and fears that others in the euro zone may soon need help, increase the risk that the BoE may need to act next year to support a recovery that was meant to be driven by exports and a credit-reliant private sector.
There is also a chance, as central bank dove Adam Posen argues, that the BoE has underestimated the impact of Britain's push to all but eliminate a record budget deficit by 2015, which starts in earnest next year.
"The economic recovery will be much weaker than the Monetary Policy Committee expects," said Vicky Redwood, a senior UK analyst at Capital Economics.
"Once the signs that the financial problems (in Europe) are translating into big economic problems, then they'll start to get worried about the prospects for UK exports."
The government wants to see the private sector expand rapidly to take up the slack as it slashes departmental spending by about 20 percent over four years. Ministers also want a rebalancing of the economy towards exports.
It is in these areas where some of the biggest dangers lie.
With Britain's top export market -- Europe -- embroiled in a sovereign debt crisis, there is a real danger that, despite sustained weakness in sterling, export demand will fail to sustain the recovery at rates which will drive economic growth.
"Over 60 percent of our exports go to a part of the world that isn't exhibiting particularly buoyant growth and clearly has quite significant challenges within the area in terms of sovereign debt," BoE Governor Mervyn King said this month.
A private sector-led recovery also needs credit and there has been little evidence that banks are eager to return to pre-credit crunch levels of lending.
Financial market ructions across Europe have not helped.
"Recent events in the last month have made everyone more pessimistic," said Ray Barrell, director of macroeconomic research and forecasting at the National Institute of Economic and Social Research. "If the economy is significantly slower, they may have to think about it (QE) again."
COUNTARGUMENT: TIME TO TIGHTEN
Some analysts and BoE hawk Andrew Sentance argue the central bank has done enough already -- slashing interest rates to a record low of 0.5 percent and embarking on an unprecedented 200 billion pound ($312 billion) asset-buying spree which it halted earlier this year.
With inflation set to stay strong next year because of a rise in VAT sales tax, they say the next move should be a slow tightening of interest rates to counter price pressures and maintain confidence in the BoE's inflation-busting credentials.
"There's been a huge amount of stimulus pumped into the economy," said George Buckley, an economist at Deutsche Bank. "The balance of risks is moving away from more QE to rate increases next year."
But the central bank could argue that since it is forecasting inflation below target on the two-year horizon at which it calibrates policy it could embark on another round of asset-buying with new money even if price pressures are high in 2011.
The Federal Reserve has already done so in the United States.
The risks to the Bank's forecasts -- it is expecting the economy to expand by about 2.6 percent next year, accelerating to more than 3 percent growth in 2012 and beyond -- are large.
Those estimates, updated on Nov. 10, are among the highest out there. The consensus among economists is for growth of about 1.9 percent in 2011 and around 1.8 percent in 2012.
The Bank has proved too optimistic before.
"They have had to slash their growth forecasts over the last few years," Buckley said.
This week, Britain's independent Office for Budget Responsibility, whose forecasts feed into fiscal policy, cut its estimates for 2011 to 2.1 percent and for 2012 to 2.6 percent.
If the BoE's forecasts are too high, inflation could fall even lower below target in the medium term and strengthen the case for action.
"It's premature to completely write it (more QE) off," said Moyeen Islam, a gilts strategist at Barclays Capital.
"I think the market -- particularly if the fiscal problems in Europe remain, and banks highlight the external risks to the economy from that -- might creep to pricing more QE in." (Additional reporting by Fiona Shaikh, editing by Mike Peacock)