By Tetsushi Kajimoto

TOKYO (Reuters) - Growth in Japan's industrial output ground to a halt in July after June's gains, underscoring the fragility of factory activity - a continuing challenge to policymakers grappling with a stalling economy.

The flat reading compared with economists' median estimate in a Reuters poll of a 0.8 percent increase, following a 2.3 percent increase in June, data by the Ministry of Economy, Trade and Industry showed on Wednesday.

Manufacturers surveyed by the ministry expect output to rise 4.1 percent in August and decline 0.7 percent in September.

Sluggish factory output data is yet another setback for policymakers who have struggled to generate virtuous growth in consumption and production to lift an economy mired in nearly two decades of deflation and stagnation, without much success.

The ministry maintained its assessment on industrial output, saying production was seesawing but a pickup was seen in some parts.

Growth in Japan's economy, the world's third largest, stalled in April-June, and analysts expect any rebound in the current quarter to be modest due to weak global demand and a strong yen that undermines exports and capital expenditure.

With the economy stalling and price growth well short of the Bank of Japan's 2 percent target, a majority of economists expect the central bank to ease policy further next month alongside a planned review of its existing stimulus program.

The government, for its part, is set to roll out economic stimulus featuring 13.5 trillion yen ($132 billion) in fiscal measures for public works and other spending to spur economic growth.

($1 = 102.2300 yen)

(Reporting by Tetsushi Kajimoto; Editing by Chris Gallagher and Eric Meijer)