Japanese factory output fell in September for the first time since the devastating March earthquake, a sign the economy's recovery from the disaster is tailing off in the face of slowing global growth, the strong yen and Europe's lingering debt woes.

The 4.0 percent September decline was bigger than expected and the impact of Thailand's floods on some industries may add to the output woes and push the world's third-biggest economy into a fresh soft patch, some analysts say.

Japan's economy had been emerging from a recession triggered by the March disaster as companies restored supply chains damaged in the quake. Manufacturers surveyed by the government expect output to rise in October and November.

But some analysts say the yen's gains, a weak global economy and the Thai floods may mean the forecasts are too optimistic.

Having rebounded following the March disaster, factory output is likely to stall until the year-end as overseas demand weakens, said Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance.

There is the possibility that manufacturers' forecasts for October and November will be downgraded as overseas economies including emerging nations are slowing down, which could weigh on Japan's exports in the October-December quarter.

September's fall in industrial output was nearly double a median market forecast for a 2.1 percent decline and followed a 0.6 percent rise in August, data by the Ministry of Economy, Trade and Industry showed on Friday.

It was the first post-quake decline and -- excluding the 15.5 percent slump in March caused by the disaster -- was the biggest fall since February 2009, when the financial crisis triggered by the collapse of Lehman Brothers hit global demand.

A fall in general machinery output, such as chip production equipment, was a major contributor to the fall, reflecting not only weaker demand growth from overseas but the impact of the strong yen on Japan's export competitiveness, analysts said.

MORE RISKS AHEAD

The ministry cut its assessment on industrial output to say it was flat as manufacturers it surveyed expect production to rise just 2.3 percent in October and 1.8 percent in November, barely enough to offset the steep decline in September.

The forecasts do not take into account the effect of output disruptions caused by the severe flood in Thailand as they were made before it happened, a ministry official told a briefing.

Several Japanese companies with operations in Thailand have been impacted by the floods, with many forced to shut down factories. Toyota Motor Corp <7203.T> said on Thursday it would suspend Thai production for a fourth week and reduce output as far afield as North America and South Africa.

The Japanese output data underscores the Bank of Japan's view that the yen's strength and slackening global growth are threatening recovery, which led it to ease monetary policy for the second time in three months on Thursday.

It may have to boost monetary stimulus again, possibly in tandem with currency intervention by the finance ministry, if the yen's rise persists or a plan to staunch the euro zone sovereign debt crisis agreed this week fails to produce lasting results.

Companies are forecasting gains in production in the future, but there is a chance that production could undershoot these forecasts as that has happened in the past few months, said Shuji Tonouchi, senior fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities.

It is clear that the government and the BOJ are worried about the yen and overseas economies, so there is a chance of intervention or additional easing.

Finance Minister Jun Azumi repeated his warning that Tokyo was prepared to step into currency markets if needed, as the yen hovered near a record high around 75.90 to the dollar.

Currencies should reflect economic fundamentals. We are very worried about speculative moves and will take decisive measures when necessary, Azumi told reporters on Friday.

Other data also pointed to mounting risks to the recovery.

Energy costs pushed up core consumer prices in September, but a narrower measure showed that costs continued to decline as falling wages and worries about the global economy threaten to dampen consumption. Separate data showed that household spending fell in September from a year earlier, for a seventh consecutive monthly decline.

The BOJ on Thursday cut its economic forecasts because of slowing global growth, but still predicts a moderate economic recovery in the next two years, underpinned by reconstruction spending at home and the resilience of emerging economies.

That is largely in line with a Reuters poll, which forecast this month that Japan's economy would grow 0.2 percent in the fiscal year through next March and 2.2 percent in the following year.

(Editing by Edmund Klamann and Neil Fullick)

Thailand Japan South Africa Quake