UPDATE 1-Greek bank deposits fall in February, lending shrinks
* Business, household deposits drop 0.3 pct in Feb.
* Private sector credit shrinks 4 pct yr/yr
* Credit expansion needed to fuel economic growth (Adds Feb. credit data, background)
ATHENS, March 27 (Reuters) - Greek bank deposits dropped in February for a second month in a row and private sector lending continued to shrink, central bank data showed on Thursday, with no sign of the credit expansion needed to spur economic recovery this year.
Deposits of businesses and households dropped to 160.5 billion euros ($221.3 billion) from 161 billion in January, to their lowest level since October, the Bank of Greece said, mainly due to a decrease in business deposits.
Greece's economy is expected to pull out of a six-year recession this year. The central bank projects national output will expand by 0.5 percent and has said credit expansion will be crucial in fueling growth.
February data showed lending to the private sector shrank 4 percent year-on-year, with the pace of contraction unchanged from a month earlier.
Hit by austerity and record unemployment above 27 percent, Greek households have been tapping savings to cope with economic hardship as banks struggle with rising amounts of non-performing loans.
Falling deposits have weakened banks' capacity to provide fresh loans to businesses and households but lenders have started to regain access to capital markets, which can help funnel liquidity to the economy.
High borrowing costs have also dampened companies' and citizens' demand for credit. Average real interest rates on new loans hit 7.2 percent in January despite record-low ECB benchmark rates.
Loans to businesses, a narrower measure in the private sector overall credit figures, dropped 5.2 percent in February year-on-year, the same pace of decline as the previous month, the Bank of Greece said.
Lending to households and private non-profit institutions shrank 3.3 percent, with the pace of contraction easing a touch from 3.4 percent in January. (Reporting by George Georgiopoulos and Harry Papachristou; Editing by Susan Fenton)