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UPDATE 2-Italy Oct business confidence down, Fiat weighs

(Adds fresh analyst comment, quote from business)

By Julia Hancock

ROME, Oct 25 (Reuters) - Italian business confidence fell in October from September, largely dampened by a crisis rocking the country's sole mass-market automaker Fiat , economic research institute ISAE said on Friday.

Darkening the picture further, analysts noted there appears to be little scope for improvement in the near term.

The government-funded body ISAE said its business confidence index in the euro zone's third-largest economy fell to a seasonally-adjusted 95.3, from 95.8 in September.

"It is likely that, among other things, the announcement of the serious crisis in the auto sector is the main cause of the strong increase in pessimism regarding short-term economic prospects," ISAE said in a statement.

ISAE said that stripping out the auto industry component, which accounted for 4.7 percent of the index, the business confidence index had actually risen in October. But analysts said that it was impossible to separate the two.

"Unfortunately the crisis at Fiat exists and Fiat is a big reality in Italy," said Fabio Scacciavillani, an economist at Goldman Sachs in London. "In general, there are very few reasons for optimism."

Fiat, Italy's largest private sector employer, announced plans earlier this month to lay off more than 8,000 workers, or more than 20 percent of its Italian car workers, as it struggles to cut costs and stem losses at its auto unit expected to exceed one billion euros this year.

In September, business confidence had risen for the first time since May on short-term prospects but analysts had forecast a fall in October and expected the gloom to continue.

"The fall was in line with consensus," said 4Cast research group in London. "Risks remain on the downside, given the discouraging raft of data and gloomy economic prospects."

"The situation remains gloomy and it is hard to detect any hint of a turnaround," echoed Scacciavillani.

Recent data from Europe had shown industrial output edging up slightly in August but economists have said that the recovery still looks sketchy, especially with layoffs weighing on consumer and business confidence.

Reuters's forward-looking Eurozone Purchasing Managers' Index in September in fact fell below the crucial 50 mark separating growth from shrinkage. It dropped to 48.9, with demand, production and jobs all down.

HOPE FOR NO FURTHER FALLS

In a breakdown of the business confidence data, ISAE said the 4,000 businesses polled between October 4-18 said the outlook for orders was flat from last month.

Stock inventories, which ISAE said remained at below-normal levels, continued to fall again after posting a rise in September. The index slipped to minus 6 from minus 4 last month.

The production outlook also fell, slipping to 16 from 20 in September.

"A global reading of the data suggests the weakness will last to year-end but we will not necessarily see a further fall," said Annalisa Piazza, an analyst at Stone & McCarthy.

On a sweeter note, however, some sectors say they are actually benefiting from the economic downturn. Bauli, one of Italy's leading bakeries which specialises in Italian Christmas cakes, says it sees gloom increasing the desire for sweets.

"When you feel so poor the last thing you want to give up is something sweet," Alberto Bauli, the group's chairman, told Reuters.