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LISBON, Feb 12 (Reuters) - Portugal's economy expanded a weaker-than-expected 0.2 percent in the fourth quarter after zero growth in July-September, again weighed down by falling investment that bodes ill for the country's growth and fiscal prospects while its debt costs soar.
The National Statistics Institute said in its flash estimate full-year growth still reached 1.5 percent, as predicted by the new minority Socialist government that took over in November after an inconclusive election.
The European Commission has already forced the government to diminish its growth projections for this year to 1.8 percent from more than 2 percent and promise more fiscal measures to meet stricter budget deficit goals. Business lobby groups have warned new taxes will weigh on investment and growth.
"A weak fourth quarter is not good news for this year's growth projections," said Diego Iscaro, senior economist at IHS Economics in London. He said that political uncertainty resulting from the October election took its toll on growth, especially on investment, as firms were in wait-and-see mode.
"In our view, the disappointing fourth quarter figures significantly increase the probability of Brussels asking Portugal to implement more fiscal measures to ensure that this year's fiscal target is met," he said.
The INE said a drop in domestic demand and investment weighed on quarterly GDP, while exports still helped the economy expand slightly compared to the previous quarter.
The government, which relies on backing from far-left parties in parliament, took over promising to reverse austerity imposed by the previous administration under an international bailout by boosting wages and pensions. It hopes that would cause a spurt of growth to allow for deficit cuts.
Some analysts fear the government could be shortlived, torn between pressure from Brussels for more budget controls and from their leftist allies for more anti-austerity measures.
Portuguese bond yields have rocketed to their highest since April 2014 as investors are concerned over global growth, the health of the European banking sector, and Portugal's political and fiscal prospects.
The INE also said that compared to the same period of 2014, the economy expanded 1.2 percent, below the average forecast of 1.4 percent in a Reuters poll of economists. In the third quarter the economy grew 1.4 percent year-on-year.
The average estimate for quarter-on-quarter growth was 0.4 percent. Despite the weaker growth in the quarter, the full-year expansion came in line with the market's and government's expectations and marks an acceleration from 0.9 percent in 2014, which was the first year of growth after a long recession. (Reporting By Andrei Khalip, editing by Axel Bugge and Toby Chopra)