UPDATE 3-Mexico retail sales dip ushers in weaker second half

* Mexico retail sales fall 1.4 percent in July month/month

* Drop is biggest since November 2011

* Sales up 2.6 percent year on year, lagging expectations

* Consumer spending seen slower but stable in second half

By Louise Egan and Krista Hughes

MEXICO CITY, Sept 20 (Reuters) - Mexican retail sales fell by the most in seven months in July as shoppers took a breather, underscoring expectations for slower growth ahead in Latin America's second-largest economy.

Sales dropped 1.4 percent in July from June, double forecasts in a Reuters poll for a 0.7 percent fall and partially offsetting a 1.8 percent jump in June, the national statistics office said on Thursday.

Economists said the figures supported expectations for a slower pace of expansion in the second half of the year following relatively strong growth in the first when spending during the presidential election campaign provided a fillip.

"The second half of the year is going to be very different from the first half because the spending related to campaigns is not there any more and secondly, lending continues to grow -- consumer consumption lending, credit cards etcetera -- but at a much more moderate pace," Nomura analyst Benito Berber said.

Weaker food and clothing sales contributed to the overall decline in retail sales while car sales held strong. Automobile sales grew for a fifth straight month in July, the best performance since 2005, according to Barclays Capital.

Analysts expect domestic spending to slow, but not collapse, in the remainder of the year after helping prop up growth during a period of weak exports. Mexico's exports rebounded in July on buying from the United States, its biggest trade partner, but data on domestic demand has been more mixed.

"The interesting thing is going to be whether what's happening in the United States will have a strong impact on the external sector and how soft the landing will be on the domestic side," Barclays economist Marco Oviedo said.

"Our expectation is that both are going to have a relatively soft landing."

According to previously released data, Mexican consumer confidence rose in July after voters elected a new government which has promised to boost economic growth, but optimism faded in August.

Private spending growth cooled to its slowest in more than two years in the second quarter, although economists said a fall in the jobless rate in July to the lowest since 2008 suggested consumer spending would hold up in the third quarter.

Mexico's central bank is expected to hold its benchmark interest rate steady at 4.5 percent through 2013 as the risks of slowing global growth offset a rise in annual inflation to its highest in more than two years due to a surge in food prices.

But Bank of Mexico board member Manuel Sanchez repeated on Thursday that rates may have to go up if inflation, now at 4.57 percent, strays too far from the central bank's comfort zone.

"Monetary policy will have to be adjusted in a timely way if convergence of inflation to the 3 percent target is endangered," Sanchez said, according to the text of a presentation he gave in London.

He also warned that slowing U.S. industrial production could significantly hurt the Mexican economy.

Compared with July 2011, sales adjusted for seasonal factors were up by 2.6 percent, lagging expectations for a rise of 4.2 percent.

Still, private sector data suggests the annual pace of retail sales growth accelerated in August. Same-store sales for Mexican supermarkets, department and specialty stores rose, on average, 4.7 percent in August from a year ago, versus a 3.6 percent expansion in July.

Finance Minister Jose Antonio Meade said late on Wednesday the government expected growth of 3.5 percent to 4 percent this year and next.