UPDATE 2-Mexico retail sales hit fastest pace in 5 months

* Retail sales rise 0.9 pct over March, vs 0.6 pct forecast

* Annual rate rises 2.5 pct, below expected 2.9 pct

By Michael O'Boyle

MEXICO CITY, June 20 (Reuters) - Mexican retail sales rose in April at their fastest pace in five months as the domestic economy built up steam, but policymakers will likely hold interest rates steady in the face of slowing U.S. growth.

Mexican retail sales rose 0.9 percent in April after a revised 0.43 percent drop in March, the national statistics agency said on Wednesday. A Reuters poll forecast a 0.6 percent increase.

The month-on-month growth was the strongest since November, and economists at Barclays said in a note that the data marked "a robust start for the second quarter of 2012."

Consumer confidence in Latin America's No. 2 economy jumped in April to its strongest in four years, but the central bank warned this month that the risks to global growth were increasing due to Europe's debt crisis.

Weakening job growth in the United States, Mexico's top trading partner, could undermine demand for the nearly 80 percent of Mexican exports sent to its northern neighbor.

Mexico's central bank chief Agustin Carstens said in an interview with local radio that Mexico's economy will grow between 3.5 percent and 4 percent in 2012, broadly in line with the central banks previous estimates.

"If the United States recovers quickly, it will be closer to 4 percent," Carstens said.

Interest rate swaps were little changed as investors stuck to bets that Mexico's central bank will leave its benchmark rate unchanged at 4.5 percent into 2014 to help support growth as the economy recovers from a deep recession in 2009.

Retail sales increased 2.5 percent in April compared with the same month a year earlier, below the 2.90 percent rate expected by analysts and less than the 4.3 percent annual rate in March.

Analysts noted that Mexican retail sales are volatile, downplayed the lower-than-expected year-on-year rate, and pointed to a 5.4 percent annual rise in same-store sales during May reported by the country's association of supermarkets and department stores.

"We firmly believe that domestic demand is not falling off a cliff. In our view, it remains strong and will be the main source of growth in 2012," Nomura analyst Benito Berber wrote in a note.