By Andrei Khalip

LISBON, Nov 13 (Reuters) - Portugal's economic growth accelerated between July and September, data showed on Friday, beating expectations and coming in far above the euro zone's sluggish average growth.

The National Statistics Institute (INE) said in its flash estimate gross domestic product (GDP) grew 0.9 percent in the third quarter, its second straight quarterly expansion, compared to just 0.4 percent for the euro zone.

It also revised upwards the quarter-on-quarter rise in April-June to 0.5 percent from 0.3 percent.

The market's average estimate for the third quarter expansion was just 0.2 percent, according to analysts.

The institute also said the economy's year-on-year decline slowed down in a sign the country may be emerging from its worst recession since 1975 -- a year after the Carnation revolution.

GDP contracted 2.4 percent year-on-year in the third quarter of 2009 after a 3.7 percent drop in the April-June period, citing a less severe reduction in investment and exports.

Bank of Portugal Governor Vitor Constancio said recently he expects a full-year 2009 contraction of less than 3 percent, an improvement from his previous 3.5 percent drop forecast, while next year there may be gentle economic growth.

Analysts said investment had apparently increased in the quarter, in part helped by public works ahead of the Sept. 27 general election, in which the Socialist government of Prime Minister Jose Socrates won a second term.

"The number was substantially stronger (than expected) with investment clearly benefitting from works linked to the election cycle and after steep falls in the previous quarters," said Rui Constantino, an economist with Santander.

Filipe Garcia of Informacao de Mercados Financeiros consultants also said that "the big surprise is at the investment level, which seems to be finally taking off," adding though that consumer demand was not yet helping growth.

But Diego Iscaro of Global Insight consultants in London warned that a strong fiscal tightening would have to follow the loosening of state purse strings, while factors like fiscal stimulus and inventory restocking driving external demand at the moment were only temporary.

"Despite this positive result, we have to remain cautious about the medium term outlook," he said, reminding of "the dire conditions of the public finances" in Portugal.

In terms of foreign trade, analysts said Portugal seemed to be taking advantage of some recovery in the economies of its key trading partners Germany and France and selling more goods there, while being affected less than expected by Spain's continuing woes and the strength of the euro currency. (Reporting by Andrei Khalip, Sergio Goncalves and Filipa Lima; Editing by Toby Chopra) Keywords: PORTUGAL GDP (andrei.khalip@thomsonreuters.com; (351) 213-509-209; RM: andrei.khalip.reuters.com@reuters.net)

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