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* Retail sales buck economists' forecasts for March fall
* Q1 retail sales volumes +0.8 pct qtr/qtr vs Q4 2013 +0.6pct
* Mortgage approvals hit 4-month low before rules tighten
* Sterling rallies to day's high (Wraps in BBA lending data, economist and market reaction)
By Andy Bruce and David Milliken
LONDON, April 25 (Reuters) - British retail salesunexpectedly chalked up modest growth in March, bucking weakindustry data and adding to signs that a consumer-led economicrecovery is taking hold.
Bank lending data also pointed to improved consumer morale,showing the first annual growth in personal loans since thedepths of the financial crisis, although fewer mortgages wereapproved as banks readied tighter lending rules.
Retail sales volumes edged up by 0.1 percent last month, theOffice for National Statistics said, beating economists'expectations for a 0.4 percent decline.
That was slower than February's bumper 1.3 percent rise, butlooking at the first three months of 2014 as a whole, retailsales rose 0.8 percent compared to a 0.6 percent rise in thefourth quarter of 2013.
This suggests consumer demand will continue to make a strongcontribution to first-quarter gross domestic product data due onApril 29, and sterling rallied to a session high against thedollar after the data.
"March's retail sales figures support the message from otherindicators that the consumer recovery retains plenty ofmomentum," said Jonathan Loynes, chief European economist atCapital Economics.
Consumer spending has been robust over the past year despitea squeeze on real incomes from inflation rising faster thanwages - something which is only now beginning to abate.
Economists expect data next week to show quarterly GDPgrowth picking up to 0.8 percent from 0.7 percent in the lastthree months of 2013, as business investment and constructionalso start to rebound. This is above Britain's long-run averagegrowth rate of around 0.6 percent a quarter.
Output, however, is still below its 2008 peak - a majorreason why the Bank of England has said it is in no hurry toraise interest rates from their record-low 0.5 percent.
Friday's retail sales data contrasted with surveys from theBritish Retail Consortium and the Confederation of BritishIndustry, which had both reported weak sales in March due to thelater-than-usual timing of Easter. The CBI has since reported arebound in sales in April.
MORTGAGE APPROVALS FALL AGAIN
The central bank has also said it does not want to useinterest rates as a first line of defence against a potentialbubble in Britain's housing market, and so is likely to berelieved that banks are starting to rein back mortgage growth.
The British Bankers' Association reported on Friday that thenumber of mortgages approved fell in March for a secondconsecutive month to its lowest level since November.
At the start of this year, BBA mortgage approvals wererunning at their highest level since 2007, and house pricesnationally are 10 percent up on a year ago.
The latest BBA data comes a day before banks are legallyobliged to make more stringent checks that borrowers will beable to continue repaying mortgages after interest rates rise.
Finance minister George Osborne - who last month extended ascheme to aid buyers of newly built homes - said on Friday thatthe changes would "help stop irresponsible lending".
Brian Hilliard, chief UK economist at Societe Generale, saidthat some of March's fall in mortgage approvals might be due tobanks tightening lending standards before the new rules come in,and that demand from buyers had also fallen recently.
"It's not surprising to see a little bit of a pause ... butI don't think we should call this the top of the mortgagemarket. It seems unlikely that there will be a step-change inbanks' lending behaviour," he said.
The BBA figures also showed that banks' lending foroverdrafts and personal loans rose on an annual basis for thefirst time since January 2009 - a sign, it said, of increasedconsumer confidence. Business lending continued to fall.
Consumers are also benefiting from falling prices for manygoods, with the ONS reporting that lower fuel prices drove a 0.5percent year-on-year drop in March, the biggest decline sinceSeptember 2009.
Year-on-year, retail sales rose 4.2 percent in March, thoughthe ONS said this partly reflected weak sales in March 2013 whenthere was very cold weather. The effect was especially markedfor non-food sales, which showed their strongest annual salesgrowth in 12 years at 9.6 percent. (Additional reporting by William Schomberg; Editing by HughLawson)
