* Output falls 1.6 pct m/m in September after August's surge
* Reuters poll had projected a drop of 0.8 pct
* Strong orders data signals further output gains
* Economy ministry says industrial sector remains "lively" (Adds analysts, data)
By Paul Carrel
BERLIN, Nov 7 (Reuters) - German industrial production fell in September after surging a month earlier, but output still grew by 0.8 percent in the third quarter as a whole and should increase further in the months ahead, the Economy Ministry said.
Industrial output fell by 1.6 percent in September after rising by 2.6 in August, the biggest gain in more than six years, data from the Economy Ministry showed on Tuesday. A Reuters poll of analysts had forecast a drop of 0.8 percent.
A breakdown of the data showed a sharp drop in production of capital goods.
But industrial activity remained "very lively" and production rose by 0.8 percent in the third quarter as a whole, the ministry said, adding: "Overall, industrial production should expand further in the coming months."
Figures from the ministry on Monday showed industrial orders rose unexpectedly in September, driven by demand from other euro zone countries for capital goods. That suggests the economy will extend its expansion in the coming months.
"Despite today's setback, all ingredients are in place to see a resurgence of industrial activity in the coming months," ING economist Carsten Brzeski said.
Despite protracted talks on forming a new German coalition government, Brzeski said, "spending more money in our view remains the easiest-to-agree-on common denominator for any next German government. Therefore, keep your seat belts fastened, the fast ride of the German economy should continue soon."
Despite weeks of exploratory discussions, Chancellor Angela Merkel's conservatives, the pro-business Free Democrats and the Greens remain far apart on a range of issues as they try to form a three-way coalition.
Helping the coalition negotiators is the strong economy, which is generating a budget surplus that leaves room to satisfy all sides, to some degree, by paying for both tax cuts and investment in areas such as upgrading infrastructure.
Germany's DIHK Chambers of Industry and Commerce last month raised its growth forecast for Europe's biggest economy to 2.0 percent for this year from its previous estimate of 1.8 percent and sees an even stronger expansion next year.
Gross domestic product growth data for the third quarter will be published on Nov 14.
Underlining the health of the economy, carmaker BMW on Tuesday raised its outlook for pretax profit this year, although third-quarter earnings fell on upfront costs for new technologies and models. It is counting on record sales of luxury cars.
Reporting by Joseph Nasr; Editing by Michael Nienaber