UPDATE 2-Muted Dutch economy sets backdrop for coalition talks

* Q2 GDP rises 0.2 pct on quarter, confirms flash data

* Business confidence declines further in Sept

* Liberals, Labour press ahead with efforts to form govt (Adds background, analyst comment)

By Thomas Escritt and Gilbert Kreijger

AMSTERDAM, Sept 24 (Reuters) - Strong exports prodded the Dutch economy to growth of 0.2 percent in the second quarter as a business confidence survey pointed to tougher times ahead.

Monday's two sets of data, which underlined the relative weakness of a domestic economy weighed down by a tough austerity programme, provided a subdued backdrop to coalition talks taking place following parliamentary elections on Sept. 12.

The Liberal and Labour parties have just started negotiations, a process that can take months in the Netherlands as would-be partners try to thrash out details of a common government programme.

Both parties are broadly supportive of the European project and aim to hit EU fiscal targets, meaning the talks are unlikely to lead to a let-up in the country's deficit-reduction programme or a spike in growth.

Where they do differ is on the pace and scale of the spending cuts needed.

"The numbers confirm what we've been seeing lately: the only support (for the economy) is coming from the external sector," said Charles Kalshoven, chief economist at ING. "With purchasing power under pressure, we expect a sluggish recovery at best."

The final GDP data matched a preliminary reading quarter on quarter, with consumer and public spending and private- and public-sector investments all falling. But it was better than the preliminary year-on-year figure, showing the economy declined by 0.4 percent.

ABN AMRO economist Nico Klene said that, in the third quarter, he expected the Dutch economy to shrink on a quarterly basis too, an impression reinforced by Monday's business confidence numbers.

The index, which measures industrial producer confidence,fell to -6.7 points in September from -4.6 points in August, showing a growing number of businesses were pessimistic about their prospects over the coming three months.

MORE AUSTERITY AHEAD

While confidence among consumers has inched up from a nine-year low, it is still weighed down by a depressed housing market, pension fund shortfalls, and fears over job security.

Government forecasts show purchasing power is likely to decline for a fourth consecutive year in 2013.

Earlier this month, Dutch consumer electronics and lighting group Philips Electronics stepped up a cost-cutting drive, saying another 2,200 jobs would be axed worldwide.

Political uncertainty has eased since the election, which offered hope of relatively pain-free coalition negotiations, though sentiment could come under renewed pressure in October when scheduled tax hikes - notably a rise in value added tax - kick in.

Outgoing finance minister Jan Kees de Jager - a fiscal hardliner - and central bank head Klaas Knot briefed the Liberals and Labour on tax issues on Monday.

Both policymakers view austerity as essential for the economy's longer-term health and have been prominent in demanding that the euro zone's weaker nations continue to work towards balancing their budgets.

The two parties have not yet announced a successor to De Jager - whose Christian Democrat party slumped in the polls and may well not join the governing coalition - but whoever replaces him is unlikely to chart a radically different course.

"We need to do something if we want the deficit below 3 percent," ING's Kalshoven said.

"If we don't, then there could be countries in southern Europe who say, 'why should we (cut our deficits)?' And that could feed the (euro zone) crisis instead of helping."

ABN AMRO's Klene said that, while the weak confidence data offered pointers to the overall performance of the economy, he expected modest quarterly GDP growth to resume in the final quarter.

Kalshoven said another chink of light came from prospects of the Liberals and Labour, who together would command a comfortable parliamentary majority, quickly forming a strong coalition.

"If the coalition process can be kept short, that will improve confidence," he said. "People will then know what's coming and will be able to calculate for the impact of certain measures." (Reporting By Thomas Escritt and Gilbert Kreijger; Editing by John Stonestreet)