By Paul Carrel

BERLIN, Feb 26 (Reuters) - German unemployment rose less than expected this month and consumer morale improved going into March, slightly lifting some of the gloom over Europe's largest economy -- although probably only temporarily.

Unemployment rose by 40,000 on the month, less than the consensus forecast for an increase of 60,000 ECONDE, as firms put workers on shorter shifts to avoid heavy redundancies.

The figures provided some relief from a recent run of grim economic news from Germany, which suffered its worst quarter since reunification in the last three months of 2008 and faces its deepest recession since World War Two this year.

Commerzbank economist Eckart Tuchtfeld said the smaller-than-expected rise in unemployment was "good news".

"A lot of companies are putting workers on short-time hours instead of using layoffs but we fear that they will have to lay off many workers in the second half of the year," he added.

Many German firms have avoided heavy layoffs so far by turning to "Kurzarbeit" -- using the unique legal provision that enables them to cut staff hours for up to 18 months. The Labour Office registered some 201,000 "short time" workers in December.

Carsten Brzeski, economist at ING Financial Markets, said the shift towards short-time work could only stem the rise in unemployment for so long.

"This safety net will only hold for several months and it is bound to crack if the economic outlook does not brighten in the second half of the year," he said.