UPDATE 1-Japan prices fall, mild deflation to persist

* Dec core CPI -0.1 pct yr/yr, matching forecast

* Core CPI falls for 3rd month, core-core CPI also lower

* Deflation prolonged due to weak demand, sluggish wages

By Kaori Kaneko

TOKYO, Jan 27 (Reuters) - Japan's core consumer prices fell for the third consecutive month in the year to December due to weak demand, showing mild deflation is likely to persist this year as energy prices stabilise and worries about Europe's debt crisis suppress wage growth.

Core consumer prices declined an annual 0.1 percent, matching the median estimate and highlighting that the economy lost momentum at the end of last year.

A narrower measure of prices that excludes both food and energy also fell from a year ago in a sign that Japan continues to grapple with a strong yen, which pushes down import prices and makes exporters reluctant to raise salaries for their workers.

The Bank of Japan and the government concede that the economy is in a lull. Both may face pressure to devise new ways to stimulate growth as Europe's sovereign debt crisis threatens to offset the economic benefits of rebuilding the country's earthquake-damaged northeast coast.

"The stagnation of other developed countries is likely to push back the timing of Japan beating deflation from mid-2010s as originally thought to the late 2010s," said Takeshi Minami, chief economist at Norinchukin Research Institute.

"The BOJ will need to keep its ultraeasy stance in the meantime. If risks from the euro-zone debt crisis heighten, it could move for an additional easing in the near term."

Japan's core consumer price index (CPI) includes oil products but excludes volatile prices of fresh fruit, vegetables and seafood.

The so-called core-core inflation index, which excludes food and energy prices and is similar to the core index used in the United States, fell 1.1 percent in the year to December, data showed on Friday.

Core consumer prices in Tokyo, available a month before the nationwide data, fell 0.4 percent in the year to January. That compares with the median estimate for a 0.3 percent annual decline.

Japan's policymakers and central bank could come under increasing pressure to support the economy with currency intervention and monetary policy easing as Europe's debt crisis weighs on external demand.

Japan's economy will likely show a mild contraction in the fiscal year ending in March but is expected to rebound next fiscal year, supported by reconstruction demand following a record earthquake on March 11 last year.

Reconstruction of the country's earthquake-damaged northeast coast could help narrow the gap between supply and demand but won't be enough to inflate demand in excess of supply and bring about an end to deflation, economists say.