By Michael Nienaber

BERLIN (Reuters) - German retail sales rose more than expected in May and jobless numbers fell further in June as upbeat consumers and local firms drive growth in Europe's largest economy, where the engineering sector sees no immediate impact from the Brexit vote.

Labour Minister Andrea Nahles said the buoyant labor market provided a solid basis for the economy to cushion any negative impact from Britain's decision to leave the European Union.

"Even if there were a dampening effect, I would say the labor market will remain a crucial anchor of stability also in light of Brexit," Nahles said on Thursday.

Economists have warned that Britain's decision to leave the 28-member bloc is likely to hit German exports and reduce growth by as much as half a percentage point next year.

The International Monetary Fund is likely to lower its growth forecast for the German economy in the coming weeks as a result of Brexit, a senior IMF official said.

Economic data released on Thursday suggested, however, that the German economy can rely on strong domestic demand, cushioning any external shock of Britain's vote to leave the EU.

German retail sales rose 0.9 percent in real terms in May, the strongest monthly increase since July 2015, data from the Federal Statistics Office showed. Economists polled by Reuters had forecast a rise of 0.7 percent.

In the less volatile period from January to May, retail sales jumped by 2.0 percent in real terms.

The data came after a survey showed on Wednesday that German consumer morale reached its highest level in nearly a year heading into July, indicating that private consumption is likely to support growth over the summer months.

The spending power of Germans is being boosted by record high employment, rising real wages and ultra-low borrowing costs, making domestic demand the most important growth driver.

BOOMING JOB MARKET

In another positive sign for domestic demand, German unemployment fell more than expected in June and the jobless rate in Europe's biggest economy remained at a record low.

"The labor market continues its overall positive development," Frank-Juergen Weise, head of the Federal Labour Office said.

The seasonally adjusted jobless total fell by 6,000 to 2.690 million, the Labour Office said. That was slightly more than the expected fall of 5,000 in a Reuters poll.

The adjusted unemployment rate remained at 6.1 percent, the lowest level since German reunification in 1990.

Strong domestic demand also helped to cushion a drop in engineering orders in May. A plunge in foreign bookings drove an overall fall of 4 percent in real terms on the year, the VDMA industry association said.

"A bright spot was the development of domestic orders. They rose by 8 percent," VDMA economist Ralph Wiechers said.

The economic consequences of Britain voting to leave the European Union are unclear and difficult to quantify at this point, Wiechers said. Any possible impact on German engineering output would not be seen before the fourth quarter, he added.

Wiechers also warned that companies could scale back investment in Britain after the Brexit vote. "The growing uncertainty will impair investment, but one can only speculate about how this will develop exactly," he said.

(Reporting by Michael Nienaber; Editing by Caroline Copley and Dominic Evans)