UPDATE 1-Angola sees 2011 GDP growth at 3.7 pct- President

* GDP growth accelerating to 12.0 pct in 2012

* Dos Santos says inflation remains a challenge

* Speculation that dos Santos has chosen successor

LISBON, Oct 18 (Reuters) - Angola's economy is likely to grow 3.7 percent this year and accelerate rapidly to 12 percent in 2012, President Jose Eduardo dos Santos said in a state of the nation address on Tuesday.

Dos Santos, who has been in power in the oil-producing African nation for over 32 years, said this year's growth rate would be lower than the 7.6 percent estimated in the budget due to lower oil output after technical problems at a field operated by BP .

"(The lower output) was only partly compensated by the rise in oil prices and accelerated growth in the non-oil sector," dos Santos said in the speech, which was broadcast by state television channel TPA.

The government said the economy grew by 3.4 percent in 2010.

Dos Santos' 2011 growth forecast was in line with that of the International Monetary Fund, which cut its GDP projection to 3.7 percent from a previous forecast of 6.5 percent.

Analysts expect Angola's oil output, which represents over 90 percent on its export revenues, to recover next year as oil fields come back on line and new projects begin production.

On inflation, dos Santos said although it is a challenge, the government would reach its target of inflation ending 2011 below 12 percent in 2011.

"It will be a great achievement if we can reach 10 percent or 11 percent inflation," he added.

Inflation slowed sharply to 11.91 percent year-on-year in September from 13.68 percent in August, suggesting plans to cut prices drastically are on track.

Dos Santos' MPLA party, which in 2002 won a 27-year civil war against UNITA and then won 82 percent of the vote in a 2008 general election, is widely seen as favourite to win another general election next year.

Still, speculation is rife that dos his rule may be about to end, with media reports citing MPLA sources that say he has selected Manuel Vicente, head of state oil company Sonangol, as his successor to take over before or shortly after the election.

His regime has also faced unprecedented dissent from a youth movement this year, with several rallies organised to call for his resignation.

"There is no basis for the assertion that there is a dictatorial regime Angola... On the contrary, there is a recent, but dynamic and participative democracy," he said.