UPDATE 3-S.Korea exports shock, inflation dips as euro crisis bites

* Jan exports -6.6 pct yr/yr (Reuters poll: +0.7 pct

* Jan CPI +3.4 pct yr/yr (Reuters poll: +3.6 pct

* Jan manufacturing PMI at 49.17 vs 46.40 in Dec

* Ships, holidays give additional blow to exports (Adds automobile exports data)

By Yoo Choonsik and Christine Kim

SEOUL, Feb 1 (Reuters) - South Korea on Wednesday posted a shock 6.6 percent annual drop in exports for January and saw new export orders fall for a sixth consecutive month as the euro zone crisis and holidays hit, kicking off a major election year on a gloomy note.

Inflation in January eased more than expected to a 1-year low of 3.4 percent on drops in fresh food prices, but looked poised to stay elevated on high oil prices and anticipated hikes in public utility charges, leaving the central bank with little room to ease policy to support the slowing economy.

Economists said the authorities, already known for their policy of keeping the won cheap, could try to bring the currency down to support exporters but added the impact of any such efforts were likely to be limited.

"The won is expected to appreciate modestly, which will not seriously hurt the price competitiveness of exports," said Lee Sung-kwon, chief economist at Shinhan Investment Corporation, referring to expectations that weakness in the U.S. dollar would continue to prop up emerging market currencies.

Exports fell year-on-year for the first time since October 2009, with sharp declines in shipments to debt-stricken Europe as the continent slides toward recession.

The drop was more than the worst forecast from a Reuters poll of 11 analysts and compared with the median expectation for a 0.7 percent gain. The consumer price index rose less than a 3.6 percent median forecast from the poll.

EURO ZONE, SHIPS, HOLIDAYS HURT EXPORTS

The won fell 0.3 percent versus the dollar, a relatively small but significant decline given foreign net buying of local stocks that amounted to about $300 million and helped push up the benchmark KOSPI 0.2 percent.

The Ministry of Knowledge Economy said weaker demand from Europe, long holidays and a lagged effect from the shipbuilding industry's slump in 2008-2009 have combined to drag exports down.

Exports to the European Union fell 44.8 percent in the first 20 days of January from a year earlier, it said.

With European demand fading fast, many export-reliant Asian economies are pinning their hopes on a recovery in consumption in the United States and China to cushion the blow.

Indeed, South Korean shipments to the United States jumped 23.3 percent in the Jan 1-20 period, while those to China rose by a smaller 7.3 percent. China is Seoul's largest export market, followed by the EU and the United States.

Exports of completed ships plunged 41.5 percent, reflecting weak orders received two or three years back during the global financial crisis.

Shipments of mobile phones tumbled 39.7 percent, mainly after Samsung Electronics started assembling more of its handsets abroad.

Even the country's automakers, used to double-digit sales growth, suffered a setback.

Reuters calculations based on company reports showed exports of domestically produced vehicles fell a combined 2.6 percent in January from a year earlier, while domestic sales slid 17.1 percent.

An official at the ministry said the average value of exports per working day excluding ships, which he said eliminates calendar and ship factors, was $1.71 billion in January this year, compared with $1.64 billion a year before.

"We definitely see exports turning back to (year-on-year) growth February," Han Jin-hyun, deputy minister for trade and investment, told reporters.

LITTLE ROOM SEEN FOR POLICY SHIFTS

Adding to the gloom, manufacturing sector activity and new export orders both shrank for a sixth straight month in January, according to an HSBC/Markit survey of purchasing managers at South Korean manufacturing firms.

Still-elevated inflation at a time when Asia's fourth-largest economy is weakening leave the country's central bank with little room to change its interest rate policy for the next several months, analysts said.

"We are keeping our view that the central bank will hike the base rate in the second half. I think it's important to say here that the next move will not be a cut," said Hwang Na-young, economist at Taurus Investment & Securities.

The Bank of Korea's head of inflation research team, Lee Jae-rang, also told Reuters it was premature for the authorities to be complacent about inflation, adding pressures will remain high for the time being.

Price rises have been a key source of public discontent with the current administration.

President Lee Myung-bak on Tuesday toughened his rhetoric on prices as his conservative party faces dwindling popularity ahead of parliamentary elections in April and presidential polls in December.

The Bank of Korea began raising interest rates in July 2010 to prevent the rapid recovery from the 2008/09 global crisis from fuelling inflation, hiking it a total of 125 basis points until June last year.

In the latest Reuters survey a small majority of analysts forecast the Bank of Korea would cut the policy rate during the first half, although a minority still saw room for a raise.

The central bank has a target of keeping the year-on-year inflation rate at between 2 percent and 4 percent for the three years to the end of this year. It will set its next inflation target later this year in consultation with the government.

Last week the government posted surprisingly weak fourth-quarter growth data.

Gross domestic product (GDP) rose a seasonally adjusted 0.4 percent in the October-December period from the previous quarter, the slowest in two years and just half the pace that economists polled by Reuters had predicted.

The economy would have shrunk in the quarter were it not for a rise in inventories, and if demand does not improve those stockpiles could end up putting a drag on future quarters as companies curb production to work through excess supplies.

Some global investment houses including Nomura see South Korea's economy contracting in the first quarter as global demand cools further and Europe's debt crisis shows little sign of abating. (Editing by Jonathan Hopfner & Kim Coghill)