UPDATE 2-Mexico economic growth slows in third quarter

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* Mexico economic growth cools to 1.6 percent

* Manufacturing contracts on U.S. slowdown

* Service sector slowdown also weighs

By Jason Lange

MEXICO CITY, Nov 21 (Reuters) - Economic growth in Mexico cooled to its weakest pace in five years in the third quarter, hurt by weaker U.S. demand for exports and a drop in oil production, the national statistics agency said on Friday.

The sharp slowdown, which stems from deep economic troubles in the United States, threatens to hurt Mexico's efforts to reduce rampant poverty. Financial firms like Morgan Stanley and J.P. Morgan see the country sliding into a recession.

"They're entering a period where they will start really feeling the pain," said Bertrand Delgado, an economist at IDEAglobal.

The total amount of goods and services produced grew by a slightly stronger-than-expected 1.6 percent annual rate during the period MXGDPY=ECI, down from a 2.8 percent reading during the second quarter.

Growth in the country's important manufacturing sector has been slowing in recent months because a collapse in the U.S. housing market has blunted Americans' appetites for Mexican factory wares.

The pain in that sector is now being passed on to the service industry, which makes up about 60 percent of the economy. Growth in services slowed to a 2.8 percent annual pace from a 3.5 percent rate during the previous quarter.

"We aren't buying as much as we used to," said security guard Jesus Velasco as he shopped at a department store in Mexico City.

A Reuters poll of experts had predicted the annual economic growth rate would be 1.49 percent in the second quarter.

Mexico sends about 80 percent of its exports to the United States, and the central bank expects the U.S economic slowdown will chill growth next year to as slow as 0.5 percent from an expected 2.0 percent rate in 2008.

"It's undeniable ... that the threat of an international recession will have a direct impact on economic growth in Mexico," Finance Minister Agustin Carstens said on Friday.

At the same time, oil output has also been slipping in Mexico, which is turning into a significant drag for the economy.

Production in the mining sector, where oil output is the most important component, plunged 6.4 percent during the second quarter from a year earlier, the statistics agency said. Mexico is the world's No. 6 producer of crude but its largest oil field is declining quickly.

The statistics agency also said the economy expanded 0.63 percent in the third quarter over the second quarter of 2008 MXGDPQ=ECI.

The manufacturing sector contracted at a 0.2 percent annual clip. Agriculture was up 4.9 percent.