(Adds market, analyst reaction)
* Retail sales fall 0.2 pct in Dec, surprisingly weak for third month
* Inflation-adjusted sales also soft, rising just 0.1 pct in Q4
* Adds to chance of more rate cuts, jobs data now in focus
By Wayne Cole
SYDNEY, Feb 6 (Reuters) - Australian retail sales fell for a third straight month in December, an extremely rare run of weakness that strengthened the case for further cut in interest rates and knocked the local dollar lower.
Wednesday's data from the Australian Bureau of Statistics showed retail sales dipped 0.2 percent in December to A$21.42 billion ($22.3 billion), upsetting forecasts of a 0.3 percent increase. The last time sales fell for three months in a row was in late 1999/early 2000.
Annual growth in sales slowed to just 2.3 percent, less than half the pace that used to be considered normal, and came despite rate cuts in both October and December.
The poor result nudged the local dollar down a quarter of a cent to $1.0375 and sharpened speculation of further cuts in rates.
The Reserve Bank of Australia (RBA) held its main cash rate steady at 3 percent on Tuesday, saying there were signs its past easing was starting to work, albeit slowly.
Yet it also left the door wide open for an easing should the economy disappoint in coming months. Investors think it will have to follow through and are priced for a quarter-point cut in April or May <0#YIB:>.
"Weak data with downward revisions as well as a weaker-than-expected monthly number and also very weak real retail sales growth," was how Matthew Johnson, an interest rate strategist at UBS, summed up the sales report.
He felt the figures raised the stakes ahead of employment data for January on Thursday.
"We need to see jobs (data) tomorrow. I think there is a 50-50 chance for a cut in March, but if we see weak jobs with a 5.6 percent unemployment rate, that will do the trick."
Analysts are tipping a slight rise of 5,000 in employment, with the jobless rate edging up a tick to 5.5 percent.
NOT GOOD FOR GROWTH
Wednesday's figures also showed that sales for the whole fourth quarter edged up by just 0.1 percent when adjusted for inflation, again under forecasts.
That suggested retail sales alone had added little to nothing to gross domestic product (GDP) in the quarter.
"It's quite hard to get a good GDP number without good retail sales, so this puts some downside risk around GDP," said Johnson.
The GDP numbers are not due until March 6, a day after the RBA's next policy meeting.
The A$260 billion retail sector accounts for 17 percent of Australia's A$1.5 trillion in annual economic output and, with 10 percent of all jobs, is the second-biggest employer after the healthcare sector.
The industry has been suffering in the face of intense foreign competition as a high local dollar makes imports cheaper. Australians have also become more cost-conscious, choosing to save more and borrow less.
Yet people are still spending, just on other things.
Services, particularly healthcare and education, are taking an ever bigger share of the pie, as is foreign travel. The high dollar encouraged Australians to holiday abroad in record numbers last year, gifting their cash to foreign retailers.
Low rates on auto loans also helped drive a record year for new vehicle sales, with sport utility vehicles in hot demand. (Editing by John Mair)