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By Mark John
PARIS, June 25 (Reuters) - French consumer spending dived 1.6 percent in May, its sharpest fall in nearly four years and new proof of the woes in the euro zone's second largest economy.
National statistics office INSEE said on Wednesday a 3.7 percent drop in household purchases of cars led spending down, with strong falls also seen in durable goods and clothing.
Economists polled by Reuters on average expected spending -- for long the driver of French growth -- to rise 0.5 percent.
The recorded fall was the worst since a 1.7 percent decline in August 1999 and outdid even the most downbeat forecast of a one percent drop.
"It is a very sharp fall that can be explained by the car industry and the bad situation in the job market," said Laure Maillard at Paris-based investment research house CDC Ixis.
"The strikes put the country in chaos and stopped many consumers from taking public transport and therefore shopping," she said over a spate of strikes last month over government plans to make workers pay longer into the state pension fund.
The summer sales season -- which started in Paris and most parts of the country on Wednesday -- could also have led to buyers deferring purchases, some analysts suggested.
Despite government assurances that low interest rates and the end of the Iraq war meant an upturn should be just around the corner, the economy is refusing to budge and speculation is mounting that official growth forecasts will be chopped again.
French non-farm payrolls fell 0.3 percent in the first quarter, data showed this month, while industrial output figures for April showed the continued impact of the Iraq war.
Finance Minister Francis Mer told a closed parliamentary session this week he was sticking to an official forecast of 1.3 percent growth in 2003 but added: "We still have time to examine the possibility of weaker growth in 2003."
Didier Migaud of the opposition Socialist Party said Mer had hinted that 2003 growth would be nearer to one percent and that France's budget deficit -- already set to go over EU limits next year -- would be bigger than expected.
Year-on-year, INSEE said consumer spending rose one percent and business leaders insist there are still grounds for hope.
Frederic Saint-Geours, head of car-maker Peugeot, said May's three percent gain in housing starts announced on Tuesday was a sign that consumers were coming back to the market.
"The main problem is confidence. But as the political issues recede, confidence will return, and we can expect to see the car market improve in the second half," Saint-Geours told reporters at an industry conference in Paris.
"There are two things that show a return of confidence -- houses, then cars," he added.
Additional reporting by Rebecca Harrison and Glaieul Mamaghani