UPDATE 1-India's lack of industrial capacity addition worrisome

* Capital goods, manufacturing areas of concern - trade min

* Says cbank will ensure industrial credit at reasonable cost (Recasts, adds details, quotes)

NEW DELHI Feb 11 (Reuters) - India is concerned about the lack of capacity addition in its industrial sector, the trade and industries minister said on Friday, after data showed factory output in December grew at the weakest pace in 20 months.

But, Anand Sharma was optimistic factory output growth INIP=ECI would break out of the low single-digit zone it has occupied for two months.

"Still, the year-end figures would be high," Sharma said.

India's industrial output grew 8.5 percent in the previous fiscal year to March 2010.

"Yes, I am concerned that capacity addition is not taking place as it should. Also the manufacturing sector decline is there," Sharma told reporters.

"(When) it comes to the capital goods there are areas of concern which we have."

Industrial output rose an annual 1.6 percent in December, below a Reuters poll forecast of 2 percent and compared with 16.8 percent a year ago. Much of that pullback was from shrinking capital goods output. [ID:nSGE71A03U]

Analysts were sanguine about the latest reading, pointing out that it was depressed because of high year-ago figures and noting underlying growth momentum. They did not expect the figures to alter the central bank's hawkish stance. [ID:nSGE71A030]

The Reserve Bank of India has lifted interest rates seven times since last March to tame headline inflation INWPI=ECI that stood at 8.43 percent in December.

Sharma said the central bank would ensure industry would get credit at reasonable costs.

The government expects the Indian economy, Asia's third largest, to expand 8.6 percent in the fiscal year to March 2011.

Sharma added that the fragile economic situation in Europe, one of India's largest trade destinations, continued to worry Indian exporters.

India is targeting close to 15 percent export growth in the current financial year ending March as the country pulls away from the global economic slowdown, which sapped demand from many traditional export destinations in the United States and Europe. (Reporting by Matthias Williams and Jonathon Burch)