Germany's March exports beat expectations, but industrial output falls

* Exports up 0.5% vs forecast for 1.7% fall

* Industrial output unexpectedly decreases by 0.7%

* Trade surplus narrows to 14.3 billion euros (Writes through with analysts, details)

By Miranda Murray

BERLIN, May 8 (Reuters) - German exports rose unexpectedly in March, official data showed on Friday, lifted by higher demand from Europe, as industrial output fell despite a forecast rise, dampened by a drop in energy production.

German exports rose 0.5% in March over the previous month, boosted by an increase of 3.4% in shipments to other European Union countries, the federal statistics office said. Analysts polled by Reuters had expected a 1.7% decrease.

"The string of positive figures continues," said VP Bank economist Thomas Gitzel, after the statistics office reported on Thursday higher-than-expected growth in March industrial orders.

IRAN WAR WEIGHS ON OUTPUT

The rise in new orders makes the drop of 0.7% in industrial production reported on Friday tolerable, he added.

Analysts polled by Reuters had expected a 0.5% increase.

The statistics office attributed the output decrease to a drop in energy production and in machinery and equipment manufacturing.

"These strong orders are expected to boost industrial production - and, by extension, exports - in the coming months," Gitzel said, though he warned the well-being of German industry hinged on how much longer the Iran war will persist.

Sentiment indicators point to a second-quarter contraction in industrial output, because of high energy prices and supply bottlenecks resulting from the blockade of the Strait of Hormuz, said Commerzbank analyst Joerg Kraemer.

TRADE WITH US SLUMPS

A 7.9% month-on-month slump in exports to the United States in March also showed a clear drag on trade, added Gitzel.

The United States remains the biggest destination for German goods despite the slump, receiving shipments of German goods worth 11.2 billion euros in March.

Imports surged in March, rising 5.1% compared with expectations for an increase of only 0.8%.

Most imports came from China, accounting for goods worth 15.6 billion euros ($18.31 billion) and marking a 4.9% increase on the month.

As a result, the foreign trade surplus narrowed more than expected, to 14.3 billion euros ($16.80 billion), from 19.6 billion the month before. ($1=0.8514 euros) (Reporting by Miranda Murray in Berlin; Additional reporting by Amir Orusov, Simon Ferdinand Eibach; Editing by Ludwig Burger and Clarence Fernandez)