* Consumer morale rises on bolstered income expectations
* Suggests consumption to sustain German economic growth
* Yet consumer expectations for economy plunge further
By Sarah Marsh
BERLIN, Oct 25 (Reuters) - German consumer morale unexpectedly rose going into November as a strong labour market bolstered income expectations despite a darkening economic outlook, the GfK market research group said on Tuesday.
The forward-looking index of consumer morale, based on a survey of 2,000 Germans, rose to 5.3 from a reading of 5.2 in the previous month. This beat a forecast in a Reuters poll of economists for a fall to 5.1.
The sub-indices tracking income expectations and willingness to buy rose slightly, suggesting private consumption is still contributing to growth in Europe's largest economy.
"Both indicators are benefiting from the good employment situation and wage rises this year," GfK wrote in a statement.
Unemployment fell much further than expected in September, recent data showed, pushing the jobless rate to its lowest level since reunification two decades ago.
"However, the continuing discussions on the sovereign debt crisis and the threatening insolvency of Greece that will also weigh on the banking system is unsettling the population."
European Union leaders made some progress towards a strategy to fight the debt crisis on Sunday, nearing agreement on bank recapitalisation and on how to leverage their rescue fund to try to stop bond market contagion.
But final decisions were deferred until a second summit on Wednesday and sharp differences remain over the size of losses private holders of Greek government bonds will have to accept.
The GfK sub-index tracking consumers' expectations for the overall economy fell to the lowest level in more than two years. The reading of -6.2 compared with 4.8 for the previous month and 56.0 a year ago.
"The fear of the crisis impacting the real economy in Germany is significantly weighing on citizens' expectations for the economy," GfK wrote.
Germany's economy has recovered swiftly from the financial crisis, outperforming its peers and providing a crucial growth engine for Europe.
Yet recent data show the pace of expansion is easing due to a global slowdown and uncertainty in the face of the European debt crisis impacting investment and exports.
Industry orders and output are slumping, and business sentiment slid for the fourth month in a row in October, dipping to its lowest level since mid-2010.
The Economy Ministry said last week growth would increasingly be sustained by domestic demand rather than exports, particularly in light of the robust labour market.
German unemployment will continue to fall next year, with the jobless rate dropping to 6.7 percent from 7 percent in 2011, the ministry said.
German retailer Metro AG said last week it was on track to beat last year's record profit of 2.4 billion euros.
GfK said it was crucial for policy-makers to find a long-term solution to the euro zone debt crisis.
"If this does not happen, it will certainly have a negative impact on the further development of consumer morale."