China's industrial output growth hit its slowest pace in more than two years in November and inflation tumbled as economic conditions deteriorated, raising expectations Beijing will ease monetary policy again.

A batch of November data largely showed that growth in the world's second-largest economy was slowing down further as it feels the chill of the euro zone debt crisis, although retail sales were stronger than expected.

The risks (of a hard landing) are clearly there, said Stephen Green, an economist with Standard Chartered Bank in Hong Kong. We've already seen policy beginning to turn so obviously that's encouraging.

China's annual inflation rate tumbled in November to 4.2 percent, the lowest level since September 2010 and slightly below expectations. It was the first time since February that inflation had fallen below 5 percent.

Inflation has dropped rapidly since a three-year high of 6.5 percent in July, allowing Beijing to shift its policy stance towards offering support for the economy, especially as it is now closer to the full-year government target for 2011 of 4 percent.

The data showed that industrial output growth slowed to 12.4 percent in November, below expectations for 12.8 percent and its weakest pace since August 2009, Reuters data shows.

The weakness was flagged by the official purchasing managers' index (PMI), which showed factory activity in November shrank from October.

Retail sales in November rose 17.3 percent from a year earlier, slightly outpacing October's 17.2 percent and confounding economists, who had expected a slowdown to 16.9 percent.

Indeed, an HSBC PMI on services had indicated growth in the sector slowed down in November from October.

China's economic growth has slowed down for three consecutive quarters and economists widely expect full-year growth in 2012 to be below 9 percent for the first time since 2001 as the economy feels the impact of the euro-zone debt crisis and weakening demand from American buyers.

Chinese planners have focused on keeping monetary policy tight for most of this year as inflation ran well above the government's target, even as evidence grew that the real economy -- especially private businesses that create most new jobs -- was being starved of credit at affordable rates.

But moderating price pressures, as well as easing money supply pressure, allowed the People's Bank of China on the last day of November to announce a cut in the ratio of reserves banks must hold, a clear signal of a policy shift after a two-year tightening campaign.

It was the first RRR cut in three years and came into effect on December 5, releasing between 350 billion yuan and 400 billion yuan ($55 billion to $63 billion) into the banking system.

With inflation falling and data suggesting economic growth is still slowing down, most analysts expect the central bank to cut bank reserves again in January. ANZ suggests another cut could happen as soon as this month.

But inflation will help determine how much room the central bank has to keep cutting reserve rates and unleash up to 16 trillion yuan tied up in the banking system.

China's government -- which ultimately sets monetary policy -- is constrained by inflation as rising prices have a history of spurring social unrest. A big injection of cash could easily reignite sharp price rises.

So with average inflation this year running at 5.5 percent, any policy loosening will be measured, analysts said.

It's clear now that China's inflation is easing, and the process of easing is faster than expected, Wang Guobing, an economist with Northeast Securities in Shanghai said. But it's still too early to say that China will turn to a full and complete policy relaxation, he said.

The government still has to seek a balance between growth and inflation control, Wang added.

So Beijing will hold back from cutting interest rates for now, economists argue. Most suggest rates will stay on hold until the second quarter of 2012.

Interest rates remain the big ticket item that markets are eyeing, but given that inflation remains lodged above deposit rates, we feel the likelihood of movement is low at present, Alistair Thornton, an economist at IHS Global Insight in Beijing, said after the inflation data was released earlier.

(Additional reporting by Beijing economics team; Editing by Neil Fullick)

China Inflation