CORRECTED-Italy consumer morale rises more than expected to 94.2

(Corrects headline to remove reference to morale diving)

* Italians more confident about economic outlook

* Sentiment on employment improves

ROME, Feb 23 (Reuters)- Italian consumer confidence rose more than expected in February after dropping to its lowest level in at least 16 years the previous two months as expectations for growth improved, data showed on Thursday.

National statistics bureau ISTAT's headline consumer confidence index rose to 94.2, from a revised 91.8 in January.

The result was better than the average forecast in a Reuters survey of analysts which pointed to a slight increase to 92.0. Sixteen forecasts spanned from 89.0 to 93.0.

"The general outlook for the Italian economy improved significantly and expectations for increased unemployment fell," ISTAT said.

Italian Prime Minister Mario Monti took over from former Premier Silvio Berlusconi in November with Italy on the front line of the euro zone debt crisis and the yield on the 10-year benchmark bond (BTP) at 6.65 percent and rising.

Now with the yield on the 10-year benchmark at 5.5 percent and concern about a possible default ebbing, sentiment is improving despite the fact that Italy fell into a technical recession in the fourth quarter.

During the final three months of 2011, the economy contracted 0.7 percent from the previous quarter, and economists don't expect a recovery at least until the second half of 2012.

ISTAT's index measuring sentiment on the economic outlook, incorporating both the economic situation and personal finances, rose to 86.2 from 78.8, while sentiment on the current economic climate fell to 100.3 from 102.3.

A sub-index measuring expectations for an increase in unemployment fell to 82 from 96.

Consumer spending has long been an achilles heel of the Italian economy, which has been among the most sluggish in the euro zone for a decade.

Analysts say ISTAT's consumer confidence index shows little immediate correlation with spending patterns, though it does reflect longer term trends.

(Reporting by Steve Scherer) (steve.scherer@thomsonreuters.com + 39 06 8522 4232))