UPDATE 1-Sri Lanka economy slows to 2-1/2-year low on tight monetary policy

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COLOMBO, Sept 17 (Reuters) - Sri Lanka's economic growth eased to 6.4 percent in the second quarter year on year, its lowest since the fourth quarter of 2009, as the central bank's tight monetary and flexible rupee exchange rate policy weighed on external trade.

The economy expanded by 7.9 percent in the first quarter from the year-earlier period.

The central bank has raised the key policy rates twice since February to more than two-year highs, allowed a flexible exchange rate and limited this year's credit growth to prevent twin deficits in trade and balance of payments.

"Spending was low in the second quarter and corporates were waiting for the currency to stabilise," said Danushka Samarasinghe, head of research at Colombo-based TKS Securities.

"...going forward, we expect a rebound as the currency has now stabilised, though the agricultural sector may have taken a hit due to drought. The global slowdown also will have an impact. Overall, we will be able to achieve 6.6 percent growth in 2012."

The rupee has fallen 16.5 percent since Nov. 21 after the government devalued the currency by 3 percent before allowing flexibility on Feb. 8. The currency fell 4 percent in the second quarter alone.

Growth in imports contracted 1 percent in the second quarter year on year from 10.3 percent growth in the first quarter, and 17.6 percent growth in the same quarter a year ago.

Growth in the banking, insurance and real estate sub sector slowed to 6.5 percent from 7.2 percent in the first quarter and analysts blamed high interest rates.

The industrial sector grew 9.5 percent on-year in the April-June quarter, compared with a pace of 10.8 percent in Jan-March. Service sector growth moderated to 4.5 percent from 5.8 percent in the previous three-month period.

According to a Reuters poll released earlier on Monday, the central bank is expected to keep interest rates steady for a fifth straight month on Tuesday. (Reporting by Ranga Sirilal and Shihar Aneez; Editing by Nick Macfie)