By Silke Koltrowitz

ZURICH (Reuters) - Swatch Group SA <UHR.S> said on Monday Swiss competition authority Weko was examining if the world's biggest watchmaker could supply more mechanical movements to its customers than was set out in a 2013 agreement on phasing out deliveries.

Swatch's ETA unit still supplies the lion's share of mechanical watch movements -- the tiny mechanisms that make a watch tick without help of a battery -- to the industry.

Rivals built up production capacity after Swatch got the green light to phase out deliveries, a development that together with weak global demand for luxury watches led to an oversupply of movements. "Weko is currently examining if a certain liberalization of the mutual agreement is possible given the structural change that has taken place in the area of mechanical movements," Swatch Group said in reply to an inquiry from Reuters.

Swatch said liberalizing movement delivery rules would let it better meet the needs of ETA's third-party customers.

Weko confirmed a review was under way.

"I think it is to do with the lower production the industry is going through and Swatch Group probably wanting to improve its capacity utilization by supplying more movements to third parties," Kepler Cheuvreux analyst Jon Cox said:

"If business was more brisk and there were more demand for watches overall I doubt it would be looking to do that."

Watch movement makers told Reuters at an industry event in Geneva last week that weak demand had led to a glut of mechanical movements and that Swatch had signaled readiness to again deliver more movements to the industry.

"Yes, there is overcapacity in mechanical movements. You find copies of ETA movements everywhere," Laurent Besse, head of watch movement maker Soprod, had said.

Sebastien Gigon, of small movement maker Technotime, said if ETA with its pricing power was again supplying more movements this would pose problems to rivals who built up production on the assumption ETA would stop deliveries by 2019.

"I'm thinking of Sellita, but also Soprod and people like ourselves who took big risks to develop our own movements to fill the gap that Swatch was going to leave," he said.

Sellita, which is privately owned and the only competitor able to offer watch movements at comparable prices to ETA, last week declined to comment or provide any details on its business.

Several movement makers, including Vaucher Manufacture and Dubois-Depraz, said they had already cut jobs or could do so soon due to the difficult economic situation.

Swiss watch exports dropped 9.5 percent during the first four months of the year, reflecting dwindling sales and high stock levels in No.1 market Hong Kong.