UPDATE 1-L&G 9-month sales dip, sees economy improving

* Group 9-month sales 1 bln stg vs. 1.1 bln stg

* Capital surplus 2.5 bln stg at Sept. 30 (Adds detail, analyst reaction, CEO comment, share price) LONDON, Nov 3 (Reuters) - British life insurer Legal and General (LGEN.L) reported a 7 percent drop in its nine-month sales, broadly in line with expectations, and said confidence was returning to the economy.

L&G, Britain's sixth-biggest insurer by market value, had sales of 1,058 million pounds ($1.73 billion) in the nine months to Sept. 30, down from 1,137 million pounds in the same period last year, the company said in a statement on Tuesday.

Analysts had expected sales of 1,060 million pounds, according to the average of 11 estimates collected by the company.

L&G shares were flat at 77.1 pence by 0847 GMT, while the FTSE 100 share index was 1.3 percent lower.

"I don't think the market will be too disappointed with the numbers. It all seems to be going in the right direction," said ING analyst Kevin Ryan.

Insurers, heavily geared to financial markets through their investment portfolios, have benefited from a rebound in stock and bond markets since March.

But the sector continues to face weak sales as recessionary pressures force consumers to defer purchases or let existing policies lapse.

"Confidence is slowly returning to the economy. We see modest recovery in the UK going forward," L&G Chief Executive Tim Breedon said in a statement.

Breedon told reporters on a conference call that L&G, whose shares rose 25 percent in a single week last month on takeover speculation, was sceptical of the benefits of insurance industry consolidation.

He also reiterated that the group had no plans "whatsoever" to sell fund management division L&G Investment Management

L&G also said it had generated 450 million pounds of net cash in the first nine months of the year, achieving its full-year target three months a head of schedule.

The cash generation figure is before experience variances, adjustements to take account of customers letting their policies lapse earlier or later than expected.

L&G had a capital surplus of 2.5 billion pounds at Sept. 30, up from 1.9 billion pounds at the end of June, the company said. ($1=.6115 Pound) (Reporting by Myles Neligan; editing by Simon Jessop)