* Manufacturing falls 5.5 pct in June from May * Index rises smaller-than-forecast 1.1 pct year-over-year * Key rate seen held at 5.0 pct in August * Domestic demand remains firm By Moises Avila and Antonio De la Jara SANTIAGO, July 30 (Reuters) - Manufacturing production fell sharply in June from the previous month in Chile's export-dependent economy, but domestic demand remained firm, reinforcing expectations the central bank will keep interest rates steady in the near-term. Manufacturing production, a newly created index broadly comparable with the prior industrial output index, slid 5.5 percent in June from May and was up from a year earlier by only 1.1 percent, the government said on Monday. The year-on-year growth in manufacturing was only a third of the 3.4 percent rate expected by nine analysts polled by Reuters. The readings in part looked lower because of a high base of comparison set last year, when industries were recovering strongly from the devastation of a February 2010 earthquake, the INE national statistics agency said. The manufacturing slump was felt more in sectors that rely on exports to slowing economies in Europe and Asia than in industries that enjoy stable domestic demand, experts said. "Export related sectors, such as wood pulp and chemical products impacted negatively on (manufacturing), but contagion from the external crisis isn't that evident because other products that are also exported, like salmon and wine, grew," said Alejandro Puente, chief economist at brokerage BBVA in Santiago. "With this scenario and with growth in retail sales and domestic demand it's difficult to know where interest rates are heading, but we believe the central bank should keep waiting for more information and we expect rates to be held again in August," he added. Retail sales rose 8.9 percent in June from a year earlier, the INE said, a marked departure from a slowdown seen since March. Also underscoring firm domestic demand, Chile's budget director said the government posted a first-half effective fiscal surplus of 2.0 percent of gross domestic product thanks to a higher tax take from companies outside the key mining sector. The IMACEC economic activity index is seen rising 5.3 percent in June on the back of brisk demand, according to the median estimate of 12 analysts and economists surveyed by Reuters. The central bank this month kept its key interest rate at 5.0 percent for a sixth consecutive month, as expected. Minutes of the July 12 meeting, released on Monday, showed that holding rates steady was a unanimous decision by policy makers. "Holding the key interest rate was justified because its current level is within a neutral range, while the economy's output gaps are closed and inflation is around target, which gives time and flexibility to wait and gather information about the evolution of the external scenario and its impact on the Chilean economy," the minutes said. The rate remains within a neutral range, according to the minutes. The consumer price index unexpectedly turned negative in June, its first monthly decline since August 2010, with CPI posting a surprise 0.3 percent drop as housing, water, electricity, fuel and transport costs retreated. Inflation in the 12 months to June slowed to 2.7 percent, retreating below the 3.0 percent midpoint of the central bank's inflation target. "We expect the central bank to remain on hold in the very near term," Alberto Ramos, economist at Goldman Sachs, said in a note to clients. "Lingering concerns about the global macro-financial backdrop, recent better-than-expected inflation prints ... and well-aligned inflation expectations give the central bank extra degrees of freedom to eventually consider easing despite still trend-like domestic demand growth dynamics and a tight labor market," Ramos added. Chile, which provides about one-third of the world's copper, produced 452,690 tonnes of the red metal in June, up 5.6 percent from the same month a year earlier, the INE also reported on Monday. But Copper output in the world's top producer slipped 1.2 percent compared with May. "Among the reasons that explain the (year-on-year) rise are a greater copper recovery due to an increase in material to process and a rise in the production of deposits that began operations in 2011," the INE statistics agency said. In the first half of the year, Chile produced 2.64 million tonnes of copper, up 2.5 percent from the same period last year. Anglo American's disputed Los Bronces mine is being ramped up and is expected to produce a peak of 490,000 tonnes annually, positioning itself as the world's No. 5 copper mine. Antofagasta Minerals' Esperanza mine, a flagship growth project that faced problems in its production build-up last year, was inaugurated in early 2011. Chile's production of molybdenum, a metal used to strengthen steel, plummeted 30.4 percent to 2,471 tonnes in June from the same month last year due to dwindling ore grades, the INE added. Molybdenum output for the January to June period dropped 19.9 percent to 15,473 tonnes versus the same period a year ago.