* Retail sales fall 1.0 percent in December yr-on-yr
* Sales also fall 1.6 percent compared to November
* Falling demand raises concerns about deflation
By Robin Emmott
BRUSSELS, Feb 5 The euro zone's Christmas shopping season was a sore disappointment in December as demand for retail goods fell sharply despite expectations of a rise, adding to the risk of deflation for the currency bloc.
Retail sales in the 17 countries sharing the euro fell 1 percent in the month compared to the same period a year ago, the EU's statistics office Eurostat said on Wednesday, while economists polled by Reuters expected a 1.5 percent increase.
Compared to November last year, December's figures were also worse than expected, showing a 1.6 percent fall when economists forecast just a 0.5 percent dip.
Despite signs of a recovery, the sinking demand for consumer goods follows a surprise fall in euro zone inflation in January to 0.7 percent, far below the European Central Bank's target of just under 2 percent and near four-year lows.
Consumers are the weak link in the euro zone's rebound from its worst ever recession, reluctant to spend at a time of near record unemployment and which could prompt shops to lower prices to entice people back to the high street.
That risks a viscous cycle where households continue to hold back for bargains, forcing businesses to lower prices even more and increasing the chances of deflation.
Expectations are growing among economists for more ECB action, even if the euro zone is still far from Japan's deflationary spiral of the 1990s. Action includes a possible rate cut to zero when the Governing Council meets on Thursday.
Beyond cutting interest rates, the ECB has a range of other policy options it could use, including offering banks another batch of long-term loans or a U.S.-style asset buying programme to tackle the deflation risk.
However, ECB policymakers focus on the medium-term outlook rather than price swings and some economists see no need to act.
"Some expect a move on rates, some expect a move on liquidity and some expect no move at all, including us," said Greg Fuzesi at JP Morgan. "It is a very close call, but we would emphasize that the debate centres on options that would have only a modest impact on the economy."
Still, for consumers the sinking sales of goods ranging from food to medical goods across the euro zone reflects the hangover from the bloc's debt and banking crisis.
Even spending on food and drink was lower this past Christmas than it was in 2012, a sign that families may have used up much of their savings that saw them through the crisis.
Internet shopping continues to rise as people seek bargains online, while spending fell across the board, including on fuel.
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^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Reporting by Robin Emmott)