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* Aug retail sales -2.6 pct yr/yr vs f'cast -0.6 pct
* Sales down as rebound from March quake loses steam
* Yen rise, global slowdown threaten post-quake recovery
By Tetsushi Kajimoto
TOKYO, Sept 29 (Reuters) - Japanese retail sales tumbled in August from a year earlier, posting their first annual decline in three months and adding to concerns that slowing demand at home and abroad may derail the economy's recovery from the March earthquake.
Sluggish personal consumption, which accounts for roughly 60 percent of the world's No.3 economy, could be a source of concern for policymakers as they are set to burden households with tax hikes to fund reconstruction from the March disaster.
Retail sales have been rebounding in recent months from a plunge caused by the March earthquake and huge tsunami that triggered the world's worst nuclear crisis since Chernobyl in 1986 and tipped the economy into recession.
Persistently weak domestic demand, along with the damage done to exporters by a strong yen and slowing global growth, cast some doubt on the prospects for a V-shaped recovery from the latter-half of this year.
"As the earthquake effect fades; falling prices, weak employment growth and steady declines in household income continue to weigh on spending intentions and consumer sentiment," said George Worthington, chief economist at Asia-Pacific IFR Markets in Sydney.
"The weakness in retail activity looks set to extend into 2012 with fiscal and monetary policies doing little to promote a return to broader economic growth."
The 2.6 percent drop in retail sales was far bigger than a forecast from economists for a 0.6 percent annual fall and followed a revised 0.6 percent gain in July, the trade ministry said.
On the month, seasonally-adjusted retail sales fell 1.7 percent in August, down for the second month in a row.
A slump in sectors including automobiles and electronics dragged down overall retail sales in August.
Retail sales had been driven in the last few months by factors such as household demand for energy-efficient goods to cope with electricity shortages and the switch to digital broadcasting helping solid television sales.
Japan's top retailer Seven & I Holdings posted a robust first quarter as lingering aftershocks, rolling blackouts and radiation fears in the weeks following the disaster in March saw consumers stock up on basic supplies such as bottled water and toilet paper.
Economists say Japan's economy is likely to resume growing in the third quarter after three consecutive quarters of contraction, boosted by a rapid recovery in supply chains, but the outlook is increasingly murky as a strong yen and Europe's sovereign debt crisis erode exports.
The government and ruling Democratic Party agreed this week to draft another extra budget for this fiscal year worth 12 trillion yen ($157 billion), and to raise taxes worth 9.2 trillion yen over a decade to fund disaster reconstruction.
($1 = 76.425 Japanese Yen) (Reporting by Tetsushi Kajimoto; Editing by Joseph Radford)