By Christina Fincher and Fiona Shaikh

LONDON (Reuters) - Retail sales failed to grow for a second month running in September according to official data on Thursday 22 October that cast doubt on the strength of an incipient economic recovery.

The data from the Office for National Statistics, showing sales volumes were flat on the month, fed uncertainty about forecasts that figures on Friday 23 October will show the economy grew in the third quarter after more than a year of decline.

Analysts had forecast a monthly rise of 0.5 percent in retail sales. The annual rate of growth also came in below forecast at 2.4 percent.

The pound fell and government bond prices rose as the data boosted speculation the Bank of England would keep monetary policy loose for some time.

"This is yet another headwind for a UK recovery, which is not going to be able to rely on consumer spending as it normally does," said Stephen Lewis, chief economist at Monument Securities.

Industrial production in Britain plunged in August at its sharpest monthly pace since January and separate figures on Thursday 22 October showed businesses and households were continuing to pay down debt.

The flow of lending to British businesses improved sharply in August but still remained negative, with lending down 4.2 percent year-on-year, its biggest drop since the series began in 1999, the Bank's monthly Trends in Lending survey showed.

Mortgage approvals from the country's six biggest lenders held steady at 56,000 in September.

NO SPENDING SPREE

Ross Walker, UK economist at RBS, said higher taxes and restrained pay growth would continue to dampen consumers' willingness to splash out.

"The big problem is going to be disposable income," he said. "In some ways, next year could be tougher in that tax increases are going to hit far more people than unemployment has this year."

In a newspaper interview, Bank Deputy Governor Paul Tucker said the strength of recovery was still uncertain and expanding the central bank's 175 billion pound asset purchase was still an option if more needed to be done to kickstart growth.

Comments from retailers themselves also suggested that a recovery could not be taken for granted.

British retail magnate Philip Green, owner of clothing group Arcadia, predicted 2010 would be another difficult year for retailers and said the stock market had rebounded too far too soon.

"The markets are way ahead of events. I think it's going to be hard work ahead, a long slog," he told Reuters.

Despite announcing forecast-beating profits, department store chain Debenhams said the consumer outlook remained uncertain and predicted discounting this Christmas would be rife.

Thursday (22 October)'s figures provided a glimmer of hope that the impact of the housing market correction was easing. Sales of household goods rose 0.3 percent in September, taking the annual fall to 0.9 percent -- its smallest decline since December 2008.

However textile, clothing and footwear sales fell 0.5 percent on the month and there was evidence that shops were having to cut prices to lure in shoppers.

The retail sales deflator fell to -0.5 percent in September from -0.4 percent in August, its fourth consecutive month in negative territory.

(Editing by Ruth Pitchford)