* Bad loan spike stems from record household debt levels
* Bank sector profit forecasts rolled back to 4-6 pct growth
* Potential for jump in small business bad loans worrying
* Outlook for bad loans depends on pace of economic recovery (Adds link to graphic)
By Khettiya Jittapong and Manunphattr Dhanananphorn
BANGKOK, May 14 (Reuters) - An unexpected spike in bad loans at Thailand's banks in the latest quarter is set to crimp earnings growth in the sector, the latest symptom of a household debt malaise that also threatens consumer spending in Southeast Asia's second-largest economy.
Thailand's consumers are struggling to repay loans taken out on cars, homes and electronics amid easy credit and government stimulus measures in the three years to 2013 - splurging that has pushed the country's household debt to a record 85.9 percent of GDP.
A stagnant economy since Thailand's military junta seized power a year ago has kept a lid on income growth and sapped consumer confidence. Some banks have said they see bad loans climbing in the second quarter and possibly beyond if the economy recovers less than expected.
"With signs of a weaker economic outlook, it's possible that non-performing loans in the overall banking system will rise further," said Kittiya Todhanakasem, a senior executive at state-run Krung Thai Bank.
Krung Thai, the country's second largest lender, saw first-quarter non-performing loans jump 18 percent to 68 billion baht ($2 billion), the sharpest spike among the top four Thai banks.
"We hope our NPLs will improve with debt restrucuturing and we have become more cautious and are working to prevent the formation of new ones," Todhanakasem said.
Gross bad loans at commercial banks jumped 7.8 percent between end-December to March, central bank data shows. While the spike has taken the industry by surprise, overall they account for 2.4 percent of total loans - a subdued number compared to a peak of 16 percent in the early 2000s.
Banks are also well capitalised with tier-1 ratios of about 13 percent.
However signs that non-performing loans are beginning to spread from the retail sector to small and medium-sized enterprises are worrying.
"The consumer part has already played out somewhat in the auto industry, but what might come next is the SMEs," said Santiarn Sathirathai, a senior economist at Credit Suisse.
"Sometimes people borrow using the household balance sheet, but essentially the borrowing is for their own business," he said.
SMEs account for about 34 percent of gross domestic product in Thailand.
Although lenders have been bolstered by trading, net fee and insurance gains, the need to set aside more provisions, as well as declines in net interest margins on the back of rate cuts, have prompted analysts to roll back forecasts for earnings growth.
They are now predicting combined net profit at Thailand's eight biggest banks to climb between 4 percent and 6 percent this year, slower than earlier estimates of 9-10 percent.
Sunanta Vasapinyokulm, an analyst at Finansia Syrus Securities, believes banks' second-quarter earnings will decline 5 percent from the previous quarter - the first drop since late 2011 when Thailand suffered severe floods.
"It's not only a change in fundamentals, but also a decline in confidence," she wrote in a note to clients.
Banks' ability to hold down bad loan growth will to a great extent depend on the economy. The government expects it to expand around 3.7 percent this year, slightly more bullish than private economists, with growth mainly driven by a resumption in public investment.
But analysts note downside risks outweigh the upside risks. The economy likely contracted in the first quarter and over the past year the government has repeatedly revised down its growth estimates. Further falls in exports, delays in the disbursement of government funds and a sharp drop-off in consumer spending could pose serious risks to an expected recovery, they say.
$1 = 33.6500 baht Additional reporting by Nicholas Owen and Orathai Sriring; Writing by Nicholas Owen; Editing by Simon Webb and Edwina Gibbs