* S&P says French reform efforts insufficient to raise growth
* Market reaction to downgrade muted
* Government committed to all possible budget savings-Hollande
* But president says he won't sacrifice welfare model
* Industrial output fall highlights economic weakness
By Nicholas Vinocur
PARIS, Nov 8 (Reuters) - Standard & Poor's cut France's sovereign credit rating on Friday by one notch to AA from AA+, giving a thumbs-down to President Francois Hollande's efforts to put the euro zone's second largest economy back on track.
All three major rating agencies had already stripped France of its top-grade triple-A status. But S&P was the first to downgrade it for a second time, warning that the economic reforms of the past year were not sufficient to lift growth.
The downgrade reflected fears that the government may struggle to push through further unpopular changes due to violent protests against its budget policy and record low opinion poll ratings for Hollande.
But, as with previous French downgrades, market reaction was muted. By late European trading, the yield spread of French over German debt narrowed back to around the same gap as before S&P's announcement, with French bonds yielding 46 basis points more than the German benchmark.
Hollande said his Socialist-led government was committed to making all possible budget savings measures but not at the price of sacrificing France's generous welfare model.
"This policy ... is the only one that can guarantee our credibility and we can judge that from the low interest rates on the markets," he said at a World Bank conference in Paris.
Data released on Friday showed a surprise drop in industrial production in September and a wider trade deficit, underscoring weakness in an economy where unemployment is stuck at around 11 percent.
S&P adjusted its outlook for French debt to stable from negative, citing Hollande's commitment to containing net debt, which it expects to peak at 86 percent of output in 2015.
France's CAC 40 stock index was underperforming peers in afternoon trade. The index traded 0.67 percent lower at 4252.00 by 1527 GMT.
Hollande's government has enacted a modest reform to add flexibility to the labour market and a review of its generous pension system, aimed at narrowing funding shortfalls.
But the latter in particular was less than expected by the European Commission, which urged Paris this year to make structural reforms in return for giving it an extra two years to bring its public deficit within EU targets.
"If France does not change tack, it condemns itself to further long-term decline," Holger Schmieding, an economist at Berenberg Bank, wrote in a research note.
The industrial output and trade data highlighted a gulf with neighbouring Germany and raised the prospect that the French economy may have nearly stalled in the third quarter.
While Hollande has relied on tax increases to pursue budget consolidation this year, he faces virulent resistance and has already backed down on applying a tax on trucking in the face of violent protests in western France.
A survey released on Friday showed Hollande's popularity ratings were lower than any previous head of state in the 55 years of the present, presidential, system, underscoring his limited room for manoeuvre. The CSA poll showed Hollande's approval rating at 25 percent, lower than a record held by conservative Jacques Chirac, president from 1995 to 2007.
"Germany's record trade surplus in September and France's downgrade by S&P once again highlight the frightening gap between Germany and other euro zone countries," said Vincent Ganne, an analyst at FXCM.
A separate survey from French statistics agency INSEE of executives at industrial firms indicated they planned on cutting investments this year by 7 percent and 2 percent in 2014.
Philippe Waechter, head of economic research at Natixis Asset Management, said the debt downgrade reflected views that the French government was not implementing reforms needed to repair its economy and relying on hopes of cyclical upturn.
But, he added: "I don't think there will be a dramatic impact on French debt in the short term, because S&P is not expressing alarm and the outlook is stable."
The downgrade applies to France's long-term foreign and local currency debt ratings. S&P said the probability of a further rating move on France over the next two years was less than one in three.
Outspoken industry minister Arnaud Montebourg said credit rating agencies had "no credibility".
"If we pushed this logic to its conclusion, I think states should start to grade the ratings agencies," he told reporters. "There would be many dunce's hats to distribute."