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By Jonathan Saul

DUBLIN, Dec 18 (Reuters) - Ireland's economy surprised by growing in the third quarter, rebounding briefly from recession, but officials and analysts said a downturn was still deepening due to the global credit crisis and shattered business confidence.

Quarterly gross domestic product (GDP) rose 1.2 percent in the three months to end September after two consecutive quarters of contraction, a technical measure of recession. In annual terms GDP rose 0.1 percent compared to analysts' forecasts of an almost 2 percent contraction.

Gross national product (GNP) fell 0.9 percent in the third quarter, also more upbeat than forecasts, after contracting 3.5 percent in the previous three months, Central Statistics Office data showed on Thursday.

But CSO senior statistician Michael Connolly said the fall itself in GNP data was a better measure of the trends in the domestic economy because it excluded profits earned by multinationals who have a big presence in Ireland.

'There is no indication of any turnaround in the economy in the near future,' Connolly told Reuters.

Ireland was the first euro zone economy to slide into recession earlier this year, its first contraction in a quarter century, due to a bursting property bubble and the global credit crunch.

GDP dropped 0.6 percent in the second quarter and 0.3 percent in the first three months of 2008.

KBC Bank Ireland chief economist Austin Hughes said the recovery in third quarter GDP was not an accurate depiction of Ireland's 'underlying economic reality'.

'The sharp recent change in economic conditions at home and abroad suggest today's third quarter data are outdated,' he said.

'It is likely that the trajectory of growth will worsen further in late 2008 and early 2009.'

GDP rose 0.1 percent in the third quarter versus the same period in 2007, with GNP falling 4.9 percent year-on-year.

GDP in the period had been expected to contract 1.9 percent year-on-year, while GNP had been seen falling by 2.5 percent, according to a Reuters poll of economists published last month.

'A GNP figure of -4.9 percent is disastrous,' said Bloxham chief economist Alan McQuaid.

'More worryingly, early indicators are already pointing to an even greater contraction in the fourth quarter, not to mention 2009, as domestic demand is redirected in response to the recent euro exchange rate developments,' he said.

The government predicted last week the economy will shrink between 3 to 4 percent next year, making it the country's worst recession on record.

Data this week showed retail sales posted their biggest year-on-year drop in over 24 years in October with higher value added taxes announced in the budget and a weak sterling triggering an exodus of shoppers across the border to Northern Ireland.

'Retail sales figures are pointing to an even sharper decline in consumer expenditure in the fourth quarter, with the increase in VAT and the euro/sterling exchange rate expected to weigh negatively on Christmas sales,' said Bloxham's McQuaid.

Goodbody Stockbrokers chief economist Dermot O'Leary said the economic gloom was set to grow.

'Although the aggregate data create some confusion, we will not be changing our view that the economy is entering 2009 with significant downward momentum,' he said.

'We still expect the economy to contract by over 4 percent in GDP and GNP terms in 2009.'

(Editing by Patrick Graham) Keywords: IRELAND ECONOMY/GDP

(jonathan.saul@reuters.com; +353 1 500 1504; Reuters Messaging: jonathan.saul.reuters.com@reuters.net)

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