UK's Osborne avoids deficit slip-up, retail sales unexpectedly fall

(Adds reaction from DMO, IFS, analysts and market)

By David Milliken and William Schomberg

LONDON, April 23 (Reuters) - British finance minister George Osborne met his latest deficit reduction target, avoiding embarrassment two weeks before the election, but weak retail sales figures raise the risk that growth has slowed.

Osborne said the budget numbers showed the Conservative-led coalition's policies were working. The opposition Labour party said his plans for more spending cuts would do serious damage to public services.

Data showed public borrowing sank to 4.8 percent of gross domestic product in the 12 months to March, down from 5.7 percent in the 2013/14 tax year and more than 10 percent at the time of the last election in 2010.

But it is still higher than in most big advanced economies. And at just over 80 percent of GDP, net public debt has more than doubled since before the financial crisis, potentially weakening Britain's ability to respond to future crises.

Slow growth for much of Prime Minister David Cameron's term means Britain is far off his original goal of largely eliminating the deficit.

Labour and some economists argue that the weak growth was due to excessive spending cuts at the start of the parliament. The Conservatives largely blame the euro zone crisis.

Opinion polls show the Conservatives are still more trusted on the public finances than Labour, although both parties remain neck and neck in terms of voting intentions.

Osborne on Thursday urged the public to back more cuts to government spending to balance Britain's books.

The Institute for Fiscal Studies, a non-partisan body, said neither the Conservatives nor Labour had clearly set out how they would reduce the budget deficit.

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Thursday's retail sales figures added to the likelihood that Britain's strong economic growth slowed sharply in the first quarter of this year. The preliminary gross domestic product numbers are due for release nine days before the election.

The biggest fall in fuel sales in almost three years triggered an unexpected 0.5 percent drop in overall sales -- wrongfooting most economists -- although the volume of goods bought is still more than 4 percent up on last year.

HSBC economist Simon Wells said he expected growth to fall to a quarterly rate of 0.4 percent from 0.6 percent in late 2014. Wells said the drop in fuel sales coincided with a rise in petrol prices from recent lows.

Sterling weakened against the dollar and British government bond prices rose after the data.

The borrowing figures prompted the British Debt Management Office to lower its plans for bond issuance by 2.5 billion pounds ($3.75 billion) this financial year to 130.9 billion pounds.

Economists welcomed a pick-up in income tax receipts, which hit a new record high. Until recently, there were concerns that strong growth was not translating into higher tax revenue. ($1 = 0.6668 pounds) (Editing by Crispian Balmer)