UPDATE 2-UK retail sales growth falls to 8-month low, public finances weak

(Corrects day in first paragraph)

* UK annual retail sales growth slows to 2.6 pct in July

* Government borrowing up 5.1 pct in first 4 months of tax year

* GRAPHIC: UK retail sales http://link.reuters.com/raz24v

* GRAPHIC: UK public finances http://link.reuters.com/suq25s

By Andy Bruce and Li-mei Hoang

LONDON, Aug 21 (Reuters) - British retail sales grew in July at the slowest annual rate since November of last year, while the government failed to make much of an inroad into public borrowing, data showed on Thursday.

The figures add to signs that Britain's consumer-led recovery might be starting to slow, which could leave the government with a lot of catching up to do to meet full-year borrowing targets before May's national election.

Monthly growth in retail sales volumes unexpectedly fell to just 0.1 percent in July, down from 0.2 percent in June. Forecasts had called for a rise to 0.4 percent.

Annual growth in the volume of goods sold dropped to 2.6 percent, the weakest since last November and again below forecasts. Sales slowed despite prices falling at their fastest rate in almost five years, giving consumers more for their money.

Sterling dipped slightly against the dollar after the data. British government bonds were unchanged.

"Today's release provides further evidence that economic expansion in the UK is slowing," said Rob Harbron, a senior economist at economics consultancy CEBR.

Government finances data showed an unexpected deficit in July for the second year running, continuing the weak start to this tax year. That is partly due to one-off effects, but it leaves the government needing a big upturn in income tax receipts to meet its fiscal goals.

SUMMER SLOWDOWN

The ONS said the biggest downward pressure on retail sales came from non-store retailing and petrol stations, and some economists said the retail data looked healthier once fuel sales and monthly volatility were stripped out.

"We do not consider this to be a sign that consumer spending is beginning to peter out. One reason is that the past two months' figures probably represent a correction to a run of strong outturns," said Philip Shaw, economist at Investec (LSE: INVP.L - news) .

Britain's consumers have been the main driver of the country's economic recovery which began last year, helped in part by low inflation that has eased the pressure on their spending power.

Wage growth, however, remains weak and increased spending has been funded in part by households cutting back on how much they save.

Prices in stores fell 0.9 percent on the year after being flat in June, the biggest decline since August 2009, the ONS said. However, household budgets are squeezed by higher prices for other goods and services, with the broader consumer price inflation measure rising by 1.6 percent in July.

FINANCES STILL WEAK

The ONS said public-sector finances, excluding financial- sector interventions, showed a deficit of 239 million pounds ($396 million) compared with a deficit 1.047 billion in July 2013. Economists polled by Reuters had expected a small surplus of 50 million pounds, as July normally sees big tax inflows.

Allan Monks, an economist at J.P. Morgan (Other OTC: MGHL - news) , said July's figures were not as disappointing as in previous months and offered some sign that borrowing was starting to trend lower.

"But unless this process accelerates, it appears that borrowing will come in 3 to 4 billion pounds higher than the Office for Budget Responsibility's 96 billion-pound projection for this fiscal year," he said.

To reach that figure, the government aimed to cut public sector net borrowing - excluding financial-sector interventions and some other factors - by 9.7 percent.

For July alone, borrowing on this measure fell to 0.8 billion pounds compared with 1.6 billion in July 2013.

But borrowing on this measure for the tax year to date is now 5.1 percent higher than the same period in 2013, largely reflecting a poor first three months of the fiscal year.

A government spokesman said this was due to a different pattern of receipts compared with 2013, when extra revenue came early in the year from a deal to recoup tax evaded by British nationals with bank accounts in Switzerland.

The government said it was banking on a big rise in income tax receipts in January to meet its goal on deficits. That goal is to cut borrowing as a share of gross domestic product from 11.0 percent when it came to power in 2010 to 5.5 percent by the end of this tax year.

Next (Other OTC: NXGPF - news) month, public sector net borrowing (PSNB) data will be released with a new methodology. PSNB, excluding financial-sector interventions, will cease to be the headline measure and will be replaced by a new measure, PSNB excluding banks.

This new measure is meant to be close to the underlying measure of public borrowing favoured by Britain's finance ministry and budget watchdog. The ONS said that in July, the new measure would have shown a deficit of around 100 million pounds.

* For more details on the methodology changes, see http://bit.ly/1p0p3M5 ($1 = 0.6031 British Pounds) (Editing by David Milliken and Alison Williams)