UPDATE 1-German industry orders drop; domestic demand slides
* Orders fall 1.4 pct in August vs forecast 0.3 pct gain
* Fall in domestic demand drives overall drop
* Consumers, firms nervous in view of debt crisis (Adds details, quotes, background)
By Sarah Marsh
BERLIN, Oct 6 (Reuters) - German industrial orders slid unexpectedly in August on a drop in domestic demand, adding to signs Europe's largest economy can no longer be relied on as a growth engine for its struggling neighbours.
A 3.2 percent drop in domestic orders drove a 1.4 percent overall month-on-month drop, the Economy Ministry said on Thursday, noting this was partly a result of the summer break. Economists in a Reuters poll had forecast a 0.3 percent rise.
"The outlook is becoming ever more unclear, like a fog. Given the enormous uncertainty on the markets and the debt crisis, so no one is ordering," said Dekabank analyst Andreas Scheuerle.
The weak reading could strengthen the case for the European Central Bank to cut rates in the near future, although it is widely expected to keep rates unchanged on Thursday.
The ministry revised July's figure up slightly to a 2.6 percent drop, from an originally reported 2.8 percent fall.
Germany has been one of the industrialised world's star performers since the end of the financial crisis, and its swift recovery has helped stimulate its trade partners.
Data provided by automotive industry group VDA this week suggested half of new German sales were imports.
Recent figures, however, show clouds gathering on the horizon in light of the twin debt crises in the U.S. and Europe.
Earlier on Thursday, the DIW economic research institute cut its forecasts for 2011 and 2012 German growth to 2.8 and 1 percent, noting consumers and firms were increasingly nervous in view of the euro zone debt crisis.
German retail sales fell at their fastest pace in more than four years in August, data showed last week, while business sentiment fell for the third month in a row in September.
Analysts have long feared exports would be the main victim in Germany of the debt crisis, hoping that domestic demand could sustain its recovery.
Yet the economy ministry noted on Thursday that foreign demand, especially from the euro zone, remains intact -- orders from the currency bloc rising 2.7 percent -- while domestic demand is weakening.
Domestic orders for consumer and capital goods fell 4.0 and 3.8 percent respectively.
"If there is not a credible solution soon to the debt crisis, consumers will hold back on purchases and companies will put their investments on ice," the DIW institute said. (Additional reporting by Madeline Chambers; editing by Anna Willard, John Stonestreet)