* Retail sales rise year on year for first time since June 2010
* September figure boosted by year-earlier sales tax hike
* Data encouraging, but no change in trend yet, says economist
* Budget deficit to August on track for 2013 target - government
By Paul Day
MADRID, Oct 29 (Reuters) - Spanish retail sales rose for the first time since June 2010 in September and the government said this year's budget was on track, offering glimmers of hope for a long-depressed economy as the country exits a two-year recession.
The 2.2 percent annual growth in sales was flattered by a rise in value added tax in September 2012, which had hit consumer spending hard in that month, and on a monthly basis retail activity fell again last month.
But the data nevertheless marked the first year-on-year rise after 38 consecutive falls, suggesting the stirrings of a recovery in domestic demand to go with the established growth in exports that is pulling the economy out of its slump.
"We've not seen a rise in retail sales for many years," said Jose Luis Martinez, economist at Citi in Madrid. "It's a good figure, but we need to wait a couple of months before drawing any conclusions."
After nine quarters of contraction, Spain emerged from recession in the three months to September, according to a Bank of Spain forecast of 0.1 percent growth that statistics institute INE is expected to confirm on Wednesday.
The recovery has been hampered by successive waves of austerity from a government intent on cutting state debt and the fiscal deficit, and a chronically high unemployment rate that has left more than one in four workers out of a job.
That, along with banks' reluctance to lend in the aftermath of a real estate crash, has crippled domestic demand, and INE said retail sales fell 2.5 percent in September from August, when they dropped a revised 4.8 percent year on year.
CLOSING THE BUDGET GAP
Since its property bubble burst in 2008, Spain has struggled to persuade wary investors it can control its finances, with the government nursing one of the largest budget shortfalls in the euro zone.
While further dampening already dire domestic demand, a slew of unpopular spending cuts and tax hikes helped Spain reduce its deficit to August, according to Treasury Ministry figures on Tuesday.
The public deficit in the first eight months of the year, excluding local authority budgets, reached 4.8 percent of economic output.
Treasury Secretary Marta Fernandez Curras said that left the government on track to hit the year-end target of 6.5 percent. "Once more, disciplined spending means we will meet the deficit target, which is also part of the economic recovery," she said.
In an attempt to boost consumption, the government has this year eased off on austerity measures, and it has promised tax cuts in 2015, an election year.
But the European Commission in Brussels is pushing Madrid to shave another around 35 billion euros from the deficit by 2016 and many economists and business leaders are concerned the slump will continue to be felt by the general population regardless of headline figures.
Amando Sanchez Falcon, executive corporate manager of the world's third biggest discount supermarket Dia, said he did not anticipate a big increase in retail sales in coming quarters.
"The market is really tough and flattish... not to say negative in terms of food consumption," he said on Monday after the group reported a rise in adjusted net profit in the third quarter.