UPDATE 1-UK borrowing below forecast, still worst since WWII

* UK 2009/10 borrowing slightly undershoots govt forecasts

* Total deficit worst since records started after WW2

* Net debt rises to 62 pct of GDP, record high for full year

LONDON, April 22 (Reuters) - Britain’s public finances suffered their worst year since World War Two in 2009/10, even though borrowing was somewhat less than the government had forecast, official data showed on Thursday.

The Office for National Statistics said the government’s preferred measure of public sector net borrowing hit 163.4 billion pounds ($252.5 billion) in the fiscal year that ended in March.

That was up from 96.5 billion in 2008/09 and is equivalent to 11.6 percent of GDP.

The deterioration in Britain’s public finances since the start of the financial crisis has been a key point of contention in the political campaign ahead of a May 6 national election.

The Labour government, trailing in opinion polls, had forecast in its March budget that full year borrowing would reach 166.5 billion pounds -- which itself was a downward revision from its December estimate of 178 billion.

Sterling rose against the dollar and the euro after the better-than-expected figures.

“It’s entirely possible that the trajectory of the public finances won’t be as bad as we thought, but it’s still not a good place to start from,” said Peter Dixon, economist at Commerzbank.

March’s borrowing took total public sector net debt, including interventions to prop up Britain’s financial sector, up to 890 billion pounds or 62 percent of GDP, the highest for a financial year since records began in 1974/75.

All Britain’s main political parties are agreed on the need to cut the record deficit but the opposition Conservatives say they would start this year while ruling Labour and the Liberal Democrats would wait until next year, saying to act now would imperil a fragile economic recovery.

“The undershoot may heighten the debate between the parties ... but the big picture is that this is still the biggest budget deficit since the Second World War and on a rough par with that of Greece,” said Jonathan Loynes at Capital Economics.

“With all parties’ fiscal plans based on extremely optimistic economic assumptions and unspecified spending cuts, a further sizeable fiscal squeeze will still be needed after the election, whoever is in charge.”

The main concern for investors is that opinion polls are correct in predicting a hung parliament -- where no one party has an overall majority -- producing a weak government without the mandate to push through painful fiscal tightening. ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ For graphic on UK public sector net borrowing, click on: ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^


The ONS also released March retail sales figures which showed Britain’s tentative economic recovery remained on track ahead of first-quarter GDP figures due on Friday, which could be a key staging post in the election campaign.

Retail sales volumes rose by 0.4 percent in March versus 2.5 percent in February, giving an annual increase of 2.2 percent.

“This is all consistent with a healthy GDP growth figure of 0.4 percent quarter-on-quarter for Q1 2010,” said James Knightley, UK economist at ING.

On the debt side of Britain’s ledger, the ONS said total public sector net borrowing in March rose to 23.498 billion pounds from 20.060 billion pounds in March last year, in what is typically a heavy-spending month as civil servants rush to use up funds before the end of the fiscal year.

This was the highest monthly borrowing for March since records began in 1993, and just below private-sector economists’ consensus forecast of 24 billion pounds.

For the fiscal year as a whole, borrowing on this wider measure totalled a record 152.842 billion pounds, the highest since annual records started in 1946/47.

The alternative public-sector net cash requirement measure, which tracks immediate government funding needs and drives government bond issuance, showed borrowing of 25.752 billion pounds in March, well below economists’ forecasts of 32 billion.

For the fiscal year, PSNCR totalled 134.338 billion pounds, up from 59.561 billion in the 2008/09 fiscal year, and the highest since records began in 1963/64. (Editing by Mike Peacock)