European steel recovery fragile -German industry body

* German steel association warns of risks to recovery

* Says market environment still difficult

* Demand from outside Europe weighed down by euro strength

* Tata: Europe's return to pre-crisis demand is years away

* German January steel orders at two-year high after Q4 drop (Adds comments by Tata Steel and ThyssenKrupp (Xetra: TKA.DE - news) , background)

DUESSELDORF, Germany, Feb 11 (Reuters) - An expected recovery in the European steel sector could be derailed by fierce competition and rising raw material and energy prices, the German steel association warned on Tuesday.

Efforts to cut government budget deficits across the European Union in the past two years have squeezed companies and consumers, hurting the steel industry by curbing demand for cars, appliances and new buildings.

Though steel producers' lobby group Eurofer said last month that carmakers and construction should help revive growth this year, the president of Germany's steel association said the European sector is still in "crisis mode".

"We currently see slight recovery, albeit in a still difficult market environment ... This is a recovery from a very low level," Hans Juergen Kerkhoff told an industry conference.

European steelmakers have been squeezed by 200 million tonnes of global overcapacity and rising energy and environmental costs.

Henrik Adam, chief commercial officer of Tata Steel Europe , told the conference it might take until the end of the decade for demand from major steel-using industries in Europe to return to pre-crisis levels.

Some see tentative signs of recovery. ArcelorMittal (Other OTC: AMSYF - news) , the world's biggest steelmaker, last week forecast higher profits this year, driven by higher steel sales and margins, and an increase in iron ore production as Europe ends two years of decline.

But Austrian steelmaker Voestalpine (Xetra: 897200 - news) said on Tuesday its annual profits would decline from last year as weak energy demand in Europe hits prices for pipeline and power station projects.

BOOST FROM RESTOCKING

The German steel association's Kerkhoff expects southern European countries such as Italy and Spain to continue to lag the north but remains cautious too about Germany, accounting for about a quarter of Europe's crude steel production.

In January, German crude steel output grew by 2.2 percent from a year earlier - its fifth straight increase. But a two-year high in orders reflected earlier delays in investments that caused a 4 percent decline in orders for the quarter through December.

"This shows that the recovery is still fragile," Kerkhoff said, adding that demand from outside Europe in particular was weighed down by the euro's strength against the U.S. dollar, the Japanese yen and important emerging market currencies.

Consultancy PwC estimates that steel demand in the European Union overall will grow at an annual rate of only 1.25 percent through 2025, well below a global average of 3.5 percent, according to a study published on Tuesday.

The German steel association - representing steelmakers such as ThyssenKrupp, which is due to publish quarterly financial results on Friday - expects the country to increase its steel output by 2 percent this year to 43 million tonnes after stagnating in 2013.

But Kerkhoff said he saw German steelmakers further reducing their headcount as they cut a total of about 2 million tonnes of capacity, or around 4 percent of overall capacity, this year and next year. (Reporting by Maria Sheahan and Tom Kaeckenhoff; Editing by David Goodman/Ruth Pitchford)