Industrial output growth slowed to 8.9 percent year on year, the weakest since May 2009 and below market forecasts of a 9.1 percent rise, data from China's National Bureau of Statistics (NBS) showed on Sunday.

Fixed asset investment, which accounted for half of China's net economic growth in the first-half of 2012, grew 20.2 percent between January and August compared to the year earlier period, a touch below expectations for a 20.4 percent expansion.

Retail sales rose 13.2 percent last month from a year ago, in line with forecasts in a Reuters poll, though the trend of spending so far in 2012 has been tracking slightly lower.

The data is likely to reinforce market expectations that China will further adjust policies soon to lift an economy mired in its softest period of growth in three years.

"The headline numbers do not look very good and they suggest a pretty challenging outlook for policymakers," Zhang Zhiwei, chief China economist at Nomura in Hong Kong said.

China's vast factory sector has been badly hit by slowing new orders. Surveys of purchasing managers earlier this month showed concerns growing about new business, suggesting that manufacturers will run inventories down further before they can begin to turn production up again.

Data earlier on Sunday showed the annual rate of consumer inflation ticked up to 2.0 percent in August from July's 30-month low of 1.8 percent, suggesting that room to ease monetary policy to shore up growth may be narrowing.

Economists polled by Reuters had forecast inflation to pick up to 2.0 percent in August, but month-on-month inflation was a touch ahead of forecasts, up 0.6 percent in August versus July. Analysts had anticipated a rise of 0.5 percent.

"Inflation is coming back quickly. Together with rising home prices, it will limit the scope for further policy relaxation," said Dong Xian'an, economist with Peking First Advisory.

STICKY FOOD INFLATION

Food prices have eased sharply in 2012, but are still running at an annual rate of 5.9 percent so far - sticking above the government's overall inflation target of 4 percent.

That is especially pertinent to policymaking as most household income in China is spent on basic necessities. Average annual urban disposable income was 21,810 yuan ($3,500) in 2011.

China's economic growth has slowed for six straight quarters and analysts expect the trend to extend to a seventh when third quarter GDP data for 2012 is published. Growth in Q2 was 7.6 percent, its slackest in more than three years.

Recent data have cemented views that growth for the full year will be its lowest since 1999 and may fall below 8 percent.

Separately, the NBS said China's producer price index dropped 3.5 percent in August from a year earlier, which compared to forecasts for a 3.3 percent decline.

It marked the sixth straight month of producer price deflation, putting a further squeeze on corporate profits already dampened by a drop-off in demand at home and abroad courtesy of global economic headwinds stemming from Europe's sovereign debt crisis.

Investors widely expect the central bank to ease monetary conditions further as part of the government's campaign of "policy fine-tuning" unveiled in the autumn of 2011.

The People's Bank of China has cut interest rates twice since June and trimmed banks' required reserve ratios (RRR) in three 50 basis point steps since last November that has freed an estimated 1.2 trillion yuan ($190 billion) for new lending.

But a seeming recent preference for using money market operations over interest rates to boost liquidity conditions in the economy is seen as a sign of the policy dilemma facing a central bank and a government super hawkish on inflation and wary of aggressive rate cuts.

Officials last week revealed they had given the green light to 60 infrastructure projects worth more than $150 billion, as Beijing seeks to energise the economy. The announcement fuelled investor hopes the world's growth engine may get a lift in the fourth quarter of the year and beyond.

The approvals are roughly a quarter of the total size of the massive stimulus package unleashed in response to the global financial crisis in 2008. Fixed asset investment contributed 3.9 percentage points China's 7.6 Q2 growth.

Chinese President Hu Jintao urged Asia-Pacific nations on Saturday to speed up infrastructure development to help face the "grave challenges" from the global economy.

Qiu Xiaohua, former head of the National Bureau of Statistics and now a senior researcher with the China National Offshore Oil Corporation (CNOOC), told a forum in the city of Xiamen on Sunday that the government still had room to act to bolster growth - and urged it to do so.

"I think the government should accelerate the pace and further increase the strength of policy fine-tuning to give a lift to the economy," Qiu said, adding that he expected Q3 GDP growth to slow to 7.4 percent or less.

(Additional reporting by Aileen Wang in Xiamen; Editing by Sanjeev Miglani)

• A Permanent Economic Emergency