(Adds detail, background, economists)
BERLIN Aug 31 (Reuters) - German retail sales fell unexpectedly in July, slipping by 0.9 percent in real terms month-on-month, preliminary data showed on Friday, as consumers feeling the squeeze from higher fuel prices cut back on other items.
The notoriously volatile indicator was down 1.0 percent on an annual basis. Economists polled by Reuters had forecast retail sales would rise by 0.2 percent on the month and gain 0.4 percent on the year.
"Fuel prices are reaching record levels and this is the kind of inflation that people really feel, which in the very short-term leads households to save money on other expenditure," said Christian Schulz at Berenberg Bank.
"It doesn't mean that household consumption overall goes down but that retail sales suffer so I think the key driver behind this decline is fuel price inflation," he said.
Data earlier this week showed annual inflation accelerated to 2.0 percent in August in Europe's largest economy, on the back of higher energy prices.
But despite Friday's weak data, strong wage rises, a stable employment situation and steady consumer morale suggest private consumption will still be able to carry the traditionally export-driven German economy through the euro zone debt crisis and a slowdown in global demand this year, economists said.
"Consumption remains a fundamental pillar of support for the German economy," said Sal. Oppenheim's Ulrike Kastens.
"In 2012 and 2013 we will see positive growth figures for private consumption so I wouldn't overestimate the decline in July retail sales," she said.
German retailers have felt the pinch from the euro zone crisis in recent months, with Puma saying it would reduce sponsorships and the number of products it sells, and department store chain Karstadt saying it would cut jobs.
But the German retail market remains robust compared with that of its crisis-stricken euro zone peers like Greece, where retail sales fell by 10.3 percent in May, or Spain, where retail sales fell for a 24th straight month in June.
Data from Germany has looked increasingly ominous in recent weeks, with economic growth slowing to 0.3 percent in the second quarter on a sharp drop in investment, the private sector contracting for a fourth straight month in August and a key business sentiment survey taking a turn for the worse.
June retail sales were revised upwards to a gain of 0.5 percent on the month, from a previously reported drop of 0.1 percent. On an annual basis June sales were revised up to a gain of 3.7 percent from an increase of 2.9 percent. (Reporting by Michelle Martin; Additional reporting by Klaus Lauer; Editing by Louise Ireland and Noah Barkin)