UPDATE 2-Japan Apr steel output drop not as deep as expected

* April output down 6.3 pct yr/yr at 8.4 mln T

* Output lowest since September 2009

* Strong output raises oversupply concerns - analyst

(Recasts with more analyst comment)

TOKYO, May 23 (Reuters) - Japan's earthquake hit steel production in April but not by as much as was expected, which, with demand hit more, stirred concern over too much supply.

Crude steel output reached a higher than expected 8.42 million tonnes, down just 7.6 percent or 694,000 tonnes from March, The Japan Iron and Steel Federation said on Monday.

Output in April was the lowest in 19 months, 6.30 percent below a year earlier level.

The decline was much less than an actual drop in demand in the domestic market. Automakers had cut operations to 50 percent of their target levels due to parts shortages and power cuts.

Carmakers are the biggest clients for Japanese steelmakers, accounting for more than a third of their shipments.

"It's a little bit disappointing that we haven't seen a more of an (output) decline. I was hoping we'll see almost a 1 million tonnes-decline," said Jeremie Capron, analyst at CLSA.

"In a short term, there is an oversupply problem. It's a bad signal."

Some analysts had expected crude steel output in April to decline up to 2 million tonnes from March in the aftermath of the disaster.

Japan's big steelmakers plan to produce just 2.8 percent less crude steel in the April-June quarter than the previous quarter at 26.89 million tonnes, a government survey showed this month. [ID:nL3E7GA07W]

The companies are counting on demand related to post-quake reconstruction to mostly offset weakness in the auto sector, a government official said.

Outlook in Asia's steel market remains uncertain. Chinese mills are producing at record levels despite worries about the impact of Beijing's monetary tightening policies. Steel product prices are close to record highs, howver, and stockpiles have been falling since the new year. [ID:nL4E7GK1FR]

In Japan the only new steel demand is for less steel-intensive temporary housing projects.

Japan's exports to Asia are unlikely to pick up fast. Japanese companies operating outside Japan are cutting back production due to a limited supply of parts.

Nippon Steel Corp this month said it will cut output by 8 percent, or 660,000 tonnes, in April-June from the previous quarter. No other makers have announced production cuts. [ID:nLPE7FE01Q]

Some analysts expect Japanese carmakers' accelerating efforts to resume full production will raise demand this quarter, however.

"We expect crude steel output to continue at this level until June, but inventories won't get much higher thanks to a faster-than-expected recovery in auto production in the domestic market," said Yuji Matsumoto, analyst at Nomura Securities.

Toyota Motor Corp now sees average output in Japan and elsewhere recovering to about 70 percent of plans before the quake in June, instead of 50 percent in Japan and 40 percent overseas, as the supply bottleneck eases. Nissan Motor Co aims to restore production to full levels before an October target.

Matsumoto now sees Japan's crude steel output in the April-June quarter at around 26 million tonnes, up from his forecast of 24 million tonnes issued immediately after the earthquake. (Reporting by Yuko Inoue; Editing by Michael Watson)