(Adds market reaction, detail)
* Retail sales fall 0.1 pct, vs forecasts of 0.3 pct rise
* Sales values hit by discounting, changing spending habits
* Adds marginally to case for another cut in interest rates
By Wayne Cole
SYDNEY, Jan 9 (Reuters) - Australian retail sales were surprisingly soft in November as spending fell on clothes and household goods, a sign lower interest rates had yet to breathe life into the long-struggling bricks and mortar shopping sector.
Wednesday's data from the Australian Bureau of Statistics showed retail sales dipped 0.1 percent in November to A$21.53 billion ($22.6 billion), confounding forecasts of a 0.3 percent increase. Annual growth in sales slowed to just 2.9 percent, half the pace that used to be considered "normal".
The subdued result nudged the local dollar down a quarter of a cent to $1.0490 and added modestly to the case for further cuts in interest rates.
The Reserve Bank of Australia (RBA) eased in both October and December, taking rates to a record-matching low of 3 percent. Yet demand for credit has remained anaemic while the housing market is sluggish at best, leading some analysts to argue that further stimulus is needed.
"With credit growth also weak, there are still very few signs that interest rate relief is being used for purposes other than deleveraging," said Michael Turner, a strategist at RBC Capital Markets.
Investors are pricing in at least one more quarter-point cut, though an improving global outlook coupled with price gains for some of Australia's major exports, notably iron ore, has lessened the urgency for a move.
As a result, markets have pared back the probability of a cut at the next RBA meeting in February to around 40 percent but are fully priced for a move by April <0#YIB:>.
"With the RBA arguably getting on the front foot with two cuts and global sentiment improved over the past several weeks, today's data do not make the case for easing in February much stronger," argued Turner.
The A$260 billion retail sector accounts for 18 percent of Australia's 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 frugal, choosing to save more and borrow less.
Discounting has become commonplace. On Wednesday supermarket giant Coles said it was cutting prices on over 100 items from bread to cheese, frozen foods and health products.
Such cuts tend to crimp growth in nominal sales values, but also help hold down inflation in the economy.
Long-running shifts in spending habits also mean the retail figures alone tend to overstate the weakness of consumption.
For one, people are shopping more on the Internet, which is not fully captured by the official statistics.
A measure of online sales from National Australia Bank jumped 15 percent in November, from the month before, taking annual growth in sales to a brisk 27 percent.
The index valued online sales in Australia at A$12.6 billion for the year to November, equal to around 5.7 percent of overall retail spending.
Australians have also been taking advantage of the high local dollar to go abroad in record numbers. Monthly departures have climbed 42 percent over the past five years.
Neither have consumers been shy about buying cars. Sales of new vehicles hit an all-time high for December to be up almost 16 percent on the year, according to industry figures.
Sales of sport utility vehicles in particular had a barnstorming year, hardly the sign of a consumer in full retreat. (Editing by Eric Meijer)