UPDATE 1-German chemicals assoc sees slight recovery in H2

* Still sees biggest FY output slump since 1975

* Most VCI members see slight recovery in H2

* Current output at 2003 levels

(Adds details, background)

FRANKFURT, July 8 (Reuters) - German chemicals trade group VCI still expects the worst full-year drop in production output in more than 30 years in 2009 but said the beginning of a recovery was imminent in the second half.

VCI, which represents businesses in Europe's largest chemical producing country, on Wednesday reiterated a May outlook for sector sales to slump 12 percent and for production output to drop 10 percent, the worse since 1975, when soaring costs from the oil crisis buffeted the sector.

"We see a glimmer of light amid dark clouds," VCI Chairman Ulrich Lehner said in a statement.

"Production has stabilised over recent months, even though at a very low level."

Most VCI members were expecting demand to pick up slightly in the second half, the trade group said, confirming a similar assessment it gave in May.

Chemical makers, which represent Germany's fourth-largest industry sector, saw sales slump 16.5 percent in the first half, while production output dropped 15.5 percent, VCI added.

The capital-intensive chemical sector -- dragged lower by massive overhead costs -- has seen demand slump from industries hit hard by the downturn, such as electronics companies, carmakers and builders.

VCI, however, said that makers of basic chemical commodities, among the most cyclical sub-sectors in the industry, have seen demand stabilise since February, signalling that a broader recovery is in the offing.

The report adds to signs that Europe's largest economy has seen the worst of the ongoing crisis.

German manufacturing orders rose at their strongest monthly rate in nearly two years in May, official data showed on Tuesday.

A survey among purchasing managers showed earlier this month that Business activity in Germany's private sector contracted in June at the same pace as in May, but orders slid at a slower pace than in May.

VCI's outlook is at odds with gloom voiced by Germany's BASF (BASF.DE), the world's largest chemicals maker. BASF Chief Executive Juergen Hambrecht has repeatedly said that signs of a reversal of the downward trend are being overinterpreted.

BASF's German peers Bayer BAYG.DE and Merck KGaA (MRCG.DE), however, have been more optimistic about their respective chemical and plastics operations.

VCI said on Wednesday that output of German chemical plants was currently at the level of 2003 but at a much lower rate of capacity use, which stood at 72 percent in the first half.

That compares with a historic average in the European chemical industry of 82 percent.

(Reporting by Ludwig Burger, Editing by Michael Shields)