LONDON (Reuters) - British retail sales fell for the second month in a row in September, reinforcing evidence of an economic slowdown as consumers steel themselves for savage cuts in government spending and tax rises.

Matalan.com

The weaker than expected figures, capping the longest sustained fall since the turn of the year, pushed sterling lower against the dollar and euro a day after the government announced details of 81 billion pounds ($128 billion) of spending cuts.

Growth in Britain's economy, which had bounced back strongly this year from an 18-month recession, is expected to slow as the government tackles a record budget deficit, increasing the chances that more stimulus from the Bank of England will be needed.

A slight improvement in lending to British firms seen in August is not expected to last and the housing market is also weakening, with mortgage approvals by big UK lenders down in September for a fourth month in row.

"People's confidence is being sapped by a double dip in the housing market and fears over jobs or a pay freeze," said Alan Clarke, an economist at BNP Paribas. "This contributes another baby step towards a second round of quantitative easing."

The initial estimate of GDP for the third quarter will be published on Tuesday Oct 26.

Conservative finance minister George Osborne, dismissing fears on Thursday that his austerity drive is too harsh, repeated his government's mantra that monetary policy can take up the strain as deficit cuts bite.

One BoE policymaker, Adam Posen, has already called for more stimulus and there are signs others could be edging towards his view. BoE rate-setter David Miles said on Thursday there was still scope to help the economy if needed.

The central bank has so far slashed interest rates to a record low of 0.5 percent and spent 200 billion pounds of newly created money on assets to boost growth.

Official forecasts suggest half a million jobs are set to disappear from the public sector due to the cuts but opposition politicians and some economists say the job losses could soar beyond that and drive the economy back into recession.

RETAILERS SUFFER

The Institute for Fiscal Studies think tank said the deficit plan -- including the biggest cuts to public spending over a four-year period since World War Two -- would hit the poor hardest.

A KPMG/Ipsos MORI poll on Thursday showed six out of 10 Britons thought it was right to cut public spending, although more than two thirds said it would be better to slow down the pace of the planned deficit reduction.

For now, the outlook is undeniably gloomy. BoE Governor Mervyn King says Britain is in for a "sober" decade and there are broad signs that consumer activity is already on the wane.

The Office for National Statistics said retail sales volumes fell 0.2 percent in September, confounding expectations for a rise of 0.4 percent. Clothing sales suffered from the sharpest sector inflation since 1994 and petrol sales were also weak.

Budget fashion retailer Matalan said on Wednesday it expected trading conditions to remain "very challenging" and Britain's top household goods retailer, Home Retail (HOME.L), posted a 23 percent fall in first-half profit.

On Thursday, department store Debenhams (DEB.L) said the government's deficit reduction plan, which also includes a rise in value-added tax next year, would affect all retailers.

The Conservative-Liberal Democrat coalition government is hoping a surge in private sector activity will take up the slack as the public sector shrinks.

However, economists warn that without steady flows of consumer spending and bank loans -- which have failed to pick up since the global credit crisis -- the private sector will struggle to drive the recovery.

Separate figures on Thursday from the BoE showed lending to businesses rose in August for the first time since February but initial data for September indicated that rise was a one-off.

"Persistent tight credit conditions continue to pose a serious handicap to economic activity," said Howard Archer, an economist at Global Insight. "As such, the report maintains pressure on the Bank of England to revive quantitative easing."

(Editing by Hugh Lawson, John Stonestreet)