* Output jumps 1.2 percent, beating all forecasts
* Contrasts with recent poor sentiment, jobless data
* Economy expected to have grown in first quarter
* Stock market soars, but top firms have cut forecasts
By Michelle Martin
BERLIN, May 8 (Reuters) - German industrial output unexpectedly jumped in March, fanning hopes that Europe's top economy is gaining traction after a disappointing end to 2012, helped by higher exports to the euro zone.
Output jumped by 1.2 percent on the month in March - beating even the highest forecast of 0.8 percent in a Reuters poll -after an upwardly revised 0.6 percent increase in February as factories churned out more goods and energy production rose.
On Tuesday, figures showed industry orders rose again in March, suggesting Germany's manufacturing sector, which makes up around one fifth of the economy, is bouncing back.
"It looks as if the outlook for German industry is clearing slowly but surely," ING senior economist Carsten Brzeski said.
"There's a lot of contradictory signs... but industrial production looks OK - we will get out of the contraction of the fourth quarter and though we're not accelerating as much as in 2010, we won't have a recession."
Brzeski said downturns in recent sentiment indicators such as the Ifo business climate index were largely due to uncertainty caused by the euro zone crisis and Cyprus's messy bailout rather than the state of the German economy.
In a further sign Germany is not immune to global economic weakness, the government lowered its tax estimates for 2013 to 2017 - though revenues should still rise thanks to a stable job market and higher wages.
Finance Minister Wolfgang Schaeuble said Germany was still on track for taking on no new debt from 2015 and the opposition was wrong to propose higher taxes for the wealthy in its bid to unseat Chancellor Angela Merkel in September's election.
"It's not that I'm swimming in money, I am just trying not to drown in debt," Schaeuble told a news conference.
While Germany grew strongly during the early years of the euro zone crisis, the economy slowed last year. A slowdown in China, which had served as a strong alternative market for German exports, is also weighing on Europe's growth engine.
But improved demand from the single currency area helped fuel March's gains in output, which the economy ministry said meant industrial production rose about 0.2 percent in the first quarter from the fourth quarter of last year, when the German economy as a whole shrank by 0.6 percent.
It said the improving order levels and a recovery in the construction sector should give manufacturing industry further impetus in the coming months.
Recent data from Germany has been mixed, with some forward-looking indicators like business and investor sentiment worsening though consumer morale remains firm. April data showed the private sector contracted and unemployment rose, suggesting Germany may suffer another contraction in the second quarter.
David Brown at New View Economics said recent downturns in sentiment indicators were corrections after these surveys raced ahead too fast earlier in the year.
While Germany's benchmark stock market, the DAX, rose to a record high on Tuesday and retailers like Metro and Adidas have recently expressed optimism, announcements from other big German firms have been weak.
Industrial bellwether Siemens cut its profit outlook on weak demand, synthetic rubber maker Lanxess slashed its investment plans and Daimler scrapped its earnings forecast after first-quarter profit tumbled.
First quarter has shown engineering orders falling, imports and exports slumping and retail sales falling, though industry orders have risen due to the recovery in euro zone demand.
Most economists expect Germany to have grown modestly in the first three months of this year. Preliminary gross domestic product figures are due on May 15.
"But recent deterioration in sentiment indicators suggest a few more wobbles in German growth in early spring," said Christian Schulz, senior economist at ING, though the picture in Germany and abroad should brighten in coming months.