UK economy posts strong Q1, but Iran war casts shadow over outlook

* GDP rises 0.3% in March against forecast of 0.2% drop

* Data caps another conspicuously strong Q1 outturn

* Economists question seasonality issues

* Stockpiling may also have brought forward demand

* Trade data shows surge in fuel imports

By Andy Bruce and Suban Abdulla

LONDON, May 14 (Reuters) - Britain's economy grew unexpectedly in March to cap another strong first quarter, suggesting it was in better shape as the Iran war escalated than many feared, though economists said seasonal distortions were flattering the figures.

Gross domestic product increased by 0.3% month-on-month in March, the Office for National Statistics (ONS) said, against expectations in a Reuters poll of economists for a 0.2% contraction.

The services sector, construction output and manufacturing all grew strongly.

For the first quarter as a whole, the economy expanded by 0.6% - marking the third year running of conspicuously strong growth in the first quarter.

Economists said measurement issues related to shifts in spending after the pandemic may be contributing to that pattern.

Raj Badiani, economics director at S&P Global Market Intelligence, said the stockpiling of goods sparked by the Iran war may also have pulled forward demand in March.

"Nevertheless, recession risks have risen, and we now expect the UK economy to contract mildly in the second and third quarters of this year," Badiani said, citing a coming inflation surge caused by higher oil prices, and pressure on the Bank of England to raise interest rates.

The ONS said partial spending data for April "pointed to some weakening going into the second quarter".

It remains to be seen how renewed uncertainty in Westminster - with investors now unsure about the political future of Prime Minister Keir Starmer - will weigh on the economic outlook.

The ONS on Thursday published a blog that acknowledged there may be post-pandemic shifts in the timing of spending in the economy and said it was keeping its methods under review.

It nudged down its growth estimates for the first quarters of 2024 and 2025 as a result.

"It seems that something's not quite right with the way the data is being seasonally adjusted, a legacy we suspect of higher inflation and the timing of annual price hikes," said ING economist James Smith.

"Today's data won't change much for the Bank of England, which is singularly focused on the impending inflation spike and the risk of it spilling into wage growth." A Reuters poll of economists this week showed the BoE will hold borrowing costs at 3.75% this year, though over a third expect at least one rate hike as the Iran war fuels an energy price surge that drove up inflation forecasts.

Financial markets by contrast have priced in between two and three quarter-point rises this year.

Recent business surveys point to a rapid increase in cost pressures that is likely to weigh on corporate activity.

Finance minister Rachel Reeves said the data showed she had the right economic plan.

Separate trade data showed a 1.8 billion pound ($2.4 billion) jump in fuel imports during March - the third-largest monthly increase since records began in 1997 and a reflection of Britain's vulnerability to higher global energy prices in the wake of the Iran war.

($1 = 0.7390 pounds) (Reporting by Andy Bruce and Suban Abdulla; Editing by Muvija M and Paul Sandle)