UPDATE 1-India Aug industry output growth slowest in a decade

(Adds detail, analyst comment)

By Rajkumar Ray

NEW DELHI, Oct 0 (Reuters) - India's industrial output grew at its slowest pace in nearly 10 years in August, indicating high interest rates were crimping demand, and analysts said the central bank was likely to focus on easing liquidity conditions.

Production INIP=ECI rose a paltry 1.3 percent in August from a year earlier, well below a forecast of 6.1 percent and July's upwardly revised 7.4 percent, data showed on Friday.

"This shows signs of a severe slowdown... the number is way below expectations," said Rupa Rege Nitsure, chief economist at Bank of Baroda in Mumbai.

"We need to look at the data for the next few months, but given this present statistics combined with the financial situation, it can be said that India's growth will now be closer to 7 percent," she said.

Industrial output is geared mostly to the domestic market and contributes about a fifth of gross domestic product.

The latest data comes at a time when India is grappling with a cash squeeze due to the global financial crisis, a sliding stock market and rupee, and inflation which is still close to 12 percent. See [ID:nMBI001942] for inflation story.

The central bank lifted its key lending rate, the repo rate, to 9.0 percent at the end of July, its highest in seven years.