* Industrial output slumps 9.2 percent in Feb
* March inflation jumps to 3.9 percent, from 2.8 percent
* Analysts say 2010 contraction could be worse than forecast
By Harry Papachristou
ATHENS, April 9 (Reuters) - Greek industrial output slumped in February and inflation spiked in March, data showed on Friday, raising further doubts about the government's ability to manage its deficit in a deepening recession.
Greek bonds and banking stocks have taken a beating this week on doubts over Greece's ability to keep financing itself, and the data prompted warnings from economists that a painful economic contraction this year could be worse than expected. Industrial output contracted by 9.2 percent year-on-year in February from a 2.5 percent drop the previous month, Greece's statistics agency said.
March consumer price inflation jumped to 3.9 percent in March from 2.8 percent the previous month, reaching its highest level since November 2008, as fuel prices rose and the government increased taxes to shore up its ailing finances.
These figures were worse than market forecasts and threw doubts on a government target to cut its budget deficit by more than 4 percentage points to 8.7 percent of GDP this year.
"Every day that passes makes me more pessimistic about the feasibility of reaching this target," said Diego Iscaro, an economist at IHS Global Insight.
"We all knew that the recession would be bad, but after today's figures I am wondering if the fall in output isn't going to be worse than the 2.6 percent we currently expect," Iscaro added.
The Greek central bank expects the country's economy to shrink by about 2 percent this year, a forecast some analysts consider optimistic.
Domestic demand in the euro zone state of 11 million may fall by 5 percent this year, said Nikos Magginas, an analyst with National Bank of Greece, the country's biggest lender.
"The first two quarters will probably be the worst we will have seen in terms of growth over the past two decades," Magginas said.
SLUMP ACCELERATES
Greece is going through its first recession since 1993 as consumption and investment suffer from a global slowdown and a home-grown fiscal crisis.Industrial output, which makes up about 15 percent of the country's service-oriented economy, has been contracting since April 2008.
The government insists it will manage the crisis without a European Union and International Monetary Fund safety net agreed last month but with the economy so weak, that may prove impossible as it struggles to shore up its finances and service debt.
The February slump frustrated hopes that industrial output might recover after shrinking by just 2.5 percent in January, the gauge's best performance since August 2008.
"Industrial output had seemed to be having a breathing space but this didn't last at all. Economic activity will be sharply negative from February until at least June," Magginas said.
Manufacturing makes up slightly more than 11 percent of GDP. The Markit Manufacturing Purchasing Managers' Index (PMI) for Greece fell to an 11-month low of 42.9 in March from 44.2 in February, showing further divergence from recovering and less-indebted euro zone peers.
The country's debt service costs rose by 14.5 percent in the first quarter, finance ministry data showed on Friday, well above the country's 5.1 percent target.
Budget execution data for the first quarter show how much increased debt service costs derail finances. Overall spending fell 3 percent, falling short of the government's plan to cut by a 3.5 percent target over the whole year. (Reporting by Harry Papachristou; Editing by Ruth Pitchford)