Jan 27 - Irish retailers were hit by the biggest drop in sales in nearly a year in December after an unprecedented austerity budget put a dampener on the traditional Christmas splurge and signalled further pain ahead.

Clerys, a department store on O'Connell Street in Dublin, Ireland

The volume of retail sales fell 1.1 percent to stand 3.1 percent lower on the year, provisional figures showed on Thursday -- contrasting sharply with strong trade data published earlier in the week that underlines Ireland's two-speed economy.

"We're seeing phenomenal growth in exports -- significantly higher than even the current expectation. The counterpoint is a weak domestic economy and certainly the consumer is still cutting back on discretionary spending," said Dan McLaughlin, chief economist at Bank of Ireland.

Ireland's export sector is booming on the back of improved global demand and the multinationals which dominate the industry have benefited from the country's economic crisis as wages and house prices drop.

Preliminary data on Wednesday showed the trade surplus hit 4.1 billion euros in November compared with 2.8 billion euros in November 2009.

WON'T GET BETTER ANY TIME SOON

Prime Minister Brian Cowen, likely to be booted out of office in an election next month, is relying on trade to get Ireland out of a prolonged slump and help it meet its fiscal and debt targets set under an 85 billion euros EU/IMF bailout package.

But the Irish Exporters Association has warned that despite exports hitting a record high of 161 billion euros in 2010, on its calculations, and further growth expected this year, it still may not be enough to meet the IMF targets.

Cowen was forced to apply for external assistance late last year amid a deepening crisis in the domestic banking sector, which has been shut out of credit markets on concerns about spiralling property losses.

Under the terms of the rescue deal, Ireland has pledged to get its budget deficit under control by 2015 and taxpayers, with over two years of austerity under their belts, face another four years of cutbacks to compensate for a collapse in property-related tax revenues and banking losses.

The domestic economy is the driver of employment and tax revenues but is set to remain in a prolonged slump due to the austerity measures.

Economists expect retail sales to be flat over the course of 2011, according to the latest Reuters poll.

"I think we are seeing the dichotomy between the external economy and the domestic economy," said Alan McQuaid, chief economist at Bloxham Stockbrokers.

"Unfortunately it isn't going to get any better any time soon."

By Carmel Crimmins
(Additional reporting by Yara Bayoumy; Editing by John Stonestreet)