UPDATE 3-US March trade gap narrows on record import drop

(Updates with closing prices)

By Doug Palmer

WASHINGTON, May 9 (Reuters) - A record drop in U.S. imports because of slowing domestic demand took a big bite out of the U.S. trade deficit in March despite record high oil prices.

The trade gap shrank 5.7 percent in March to $58.2 billion, the Commerce Department reported on Friday, much smaller than expected. The decline reflected another strong month of U.S. exports and a record $6.1 billion drop in imports to $206.7 billion, which showed the U.S. slowdown has taken a toll on consumer and business demand for foreign goods.

"Trade continues to be a huge support for the U.S. economy. Export demand is holding up well," said Nigel Gault, chief U.S. economist at Global Insight. "Meanwhile, much of the slowdown in U.S. domestic spending is being passed on to the rest of the world through lower imports."

The narrowing trade gap means the U.S. economic growth was somewhat stronger than first estimated. Based on the trade data, Gault said he expected the government to raise its estimate of first quarter U.S. economic growth to 0.9 percent, from an initial reading of 0.6 percent last month.

Ian Shepherdson, chief U.S. economist with High Frequency Economics, pegged first quarter growth at 1.1 percent because of a stronger-than-expected contribution from trade.

U.S. Commerce Secretary Carlos Gutierrez said the March data showed a "very strong close to the quarter."

Compared with first quarter 2007, U.S. exports are up 17.6 percent, while imports have increased 12 percent, he said.