* July industrial output beats market expectations
* Aug exports, inflation both seen staying slow
* Investors divided over chances of further rate cut
(Updates throughout with more data, markets, economists)
By Christine Kim and Choonsik Yoo
SEOUL, Aug 29 (Reuters) - South Korea's industrial output grew for a second month in July, adding to signs of improving domestic consumption, but some analysts are wagering on another interest rate cut as stubbornly weak global demand drags on the export-reliant economy.
The industrial output index rose by a seasonally adjusted 1.1 percent in July from June, the Statistics Korea data showed on Friday, which far outstripped market's consensus view and followed a revised 2.6 percent jump in June.
The better result adds to recent signs that domestic demand in Asia's fourth-largest economy may be picking up after slowing in the second quarter, but other data released on Friday and due out on Monday suggest that it's too early to confirm a firm rebound.
Reflecting the fragility of the economic recovery, a central bank survey released earlier on Friday showed a sharp drop in business sentiment, while analysts surveyed by Reuters expect August exports growth and inflation to be tame.
Investment banks Nomura and ING made opposing assessments of the South Korean economy's prospects, with Nomura suggesting more chances for an additional interest rate cut soon on top of this month's reduction against ING's view that a further easing is unlikely.
"Overall, we see downside risks to our Q3 GDP growth forecast (1.2 percent quarter-on-quarter, 3.7 percent year-on-year) and therefore see the risk of another 25 bp rate cut to 2.00 percent in Q4 2014," Young Sun Kwon, an economist at Nomura in Hong Kong, said in a research note.
The Bank of Korea, the country's central bank, cut the policy interest rate early this month for the first time in 15 months by 25 basis points to 2.25 percent to join the government's drive to stimulate domestic demand.
The rate cut was widely seen to have been made under government pressure, and a Reuters poll on the same day showed that 7 analysts expected the next move to be a rate cut while 11 tipped a hike. Earlier polls had shown most had expected the next move to be an increase.
Authorities led by Finance Minister Choi Kyung-hwan, who took office last month, have been pushing hard to stimulate demand, including an $11 billion spending package, an easing of mortgage curbs and a proposal to prod big companies to invest more and pay more dividends.
The central bank did not give a clear guide on the future policy direction but analysts and bond investors were almost equally divided on the next rate move, highlighting the uncertainty about the outlook after the economy slowed to its weakest pace in over a year in the second quarter.
ING was bullish, underscoring the division in the markets on future rates policy: "The economy's strong third-quarter start leads us to review our 3Q GDP growth forecast. The data undermine the case for more BoK accommodation."
EXPORTS LAGGING
Still, exports have underperformed in recent months, putting the brakes on the economy just as a ferry disaster in April darkened the public's mood and took a toll on consumption.
Indeed, South Korean exports are seen growing just 0.2 percent in August from a year earlier and inflation holding steady in August at a low level of 1.6 percent, according to median forecasts from the Reuters survey.
South Korea's finance ministry also discounted the strong July industrial output data, warning in a statement that the output in August could suffer a setback due to partial strikes by unionised automobile workers and bad weather conditions.
The July output growth of 1.1 percent beat a median 0.3 percent gain tipped in a Reuters survey but followed a downward revision of the June reading to a 2.6 percent gain from a provisional 2.9 percent rise.
The central bank said early on Friday that the business outlook index compiled from its survey of manufacturing firms fell to a seasonally adjusted 75 for September, the lowest since May last year, from 80 for August.
Markets showed a muted reaction to the mixed set of data, with the front-month futures on three-year treasury bonds
The Ministry of Trade, Industry and Energy will publish August export and import data at 9 a.m. (0000 GMT) on Monday and Statistics Korea will release August inflation data at 8 a.m. on Tuesday (2300 GMT).
(Reporting by Christine Kim; Editing by Shri Navaratnam) ((christine.kim@thomsonreuters.com; 822 3704 5665; Reuters Messaging: christine.kim.thomsonreuters.com@reuters.net))
Keywords: SOUTHKOREA ECONOMY/OUTPUT
