UPDATE 2-Swiss antitrust body investigates Swatch unit

* Watchdog to check if ETA abused market dominant position

* ETA produces mechanical clockworks

* Swatch shares down 0.7 pct, underperforming European peers

(Adds Swatch Group comment, shares, background)

ZURICH, Sept 15 (Reuters) - The Swiss competition watchdog has launched an investigation against Swatch Group (UHR.VX) unit ETA Manufacture Horlogere Suisse SA for potential abuse of a dominant market position.

A pre-investigation yielded signs ETA had abused its potentially dominant position in the market for mechanical clockworks, the Competition Commission said on Tuesday.

Swatch Group, the world's largest watchmaker and best known for colourful plastic Swatch watches, said it was confident the results of the investigation would be positive.

"The timing for such an investigation is rather bad as since the beginning of 2009 most of the third-party clients have massively cancelled or postponed their orders," a spokeswoman for the group said in a statement.

Third-party watchmakers have cut back on orders for components from Swatch Group as the Swiss watch industry grapples with its sharpest drop in demand in around 20 years as a result of the economic slump.

The commission was mainly investigating whether ETA sold products at better conditions than other Swatch Group companies than to third-party firms, Patrik Ducrey from the commission said. The investigation was set to take about one year.

At 0754 GMT, shares in Swatch Group had slipped 0.7 percent to 236.80 Swiss francs, while the DJ personal and household goods index was flat..SXQP

The commission said it had received a number of complaints after ETA raised prices and announced new payment conditions last year.

ETA had already been investigated in 2004 after announcing it would stop delivery of clockwork kits -- so called Ebauches -- where it had market share of over 95 percent in the relevant market. The case was settled after ETA agreed to continue supplying Ebauches until the end of 2010. (Reporting by Sven Egenter; Editing by Dan Lalor)