* Aug factory output down 0.7 pct vs f'cast -0.4 pct
* Retail sales up 1.1 pct, consumption sustains momentum
* Data signals economy remains on track for recovery
* PM Abe to unveil stimulus, decide on sales tax hike
By Tetsushi Kajimoto and Stanley White
TOKYO, Sept 30 (Reuters) - Japan's industrial output slid0.7 percent in August after a hefty gain in the previous month,but analysts see factory activity and the broader economy ontrack for a steady recovery backed by exports and firm domesticdemand.
A separate survey showed manufacturing activity expanded inSeptember at the fastest pace since the March 2011 earthquake,underscoring the strength of the world's third-largest economy.
Retail sales also rose 1.1 percent in August from a yearearlier, data showed on Monday, in a sign consumer spending issustaining momentum.
The data is unlikely to change expectations for PrimeMinister Shinzo Abe to decide this week on the planned sales taxhike, the biggest effort by Japan in decades to fix its tatteredpublic finances.
"Factory output is a bit weak now but will return to levelsbefore the March 2011 earthquake around October. Companies arestarting to produce more and aren't too worried aboutuncertainties in the overseas economy," said Takeshi Minami,chief economist at Norinchukin Research Institute in Tokyo.
Abe - whose reflationary policies have boosted share prices,weakened the yen and bolstered sentiment in the world's thirdlargest economy - is expected to make the sales tax decisionafter confirming readings in a key Bank of Japan businesssentiment survey due 8:50 a.m. Tuesday (2350 GMT Monday).
The August drop in industrial output was smaller than a 0.4percent decline projected in a Reuters poll, and followed a 3.4percent gain in the previous month, data from the Ministry ofEconomy, Trade and Industry (METI) showed.
Manufacturers surveyed by the ministry expect output to rise5.2 percent in September and increase 2.5 percent in October,the data showed.
The Markit/JMMA Japan Manufacturing Purchasing ManagersIndex (PMI) rose to a seasonally adjusted 52.5 in September from52.2 in the previous month, remaining above the 50 thresholdthat separates contraction from expansion for the seventh month.
The survey showed that manufacturing activity expanded atthe fastest since February 2011, one month before the naturaldisaster struck the country's northeast coast.
Japan's economy grew an annualised 3.8 percent in the secondquarter, driven in large part by strong consumer spending, andthe central bank upgraded its assessment of the economy earlierthis month to say it was recovering moderately.
The BOJ's quarterly "tankan" corporate survey will likelyshow the headline index for big manufacturers' sentimentimproved three points from the previous quarter to plus 7,according to a Reuters poll of 22 economists.
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