China's annual consumer inflation eased to 2.1 percent in March from February's 3.2 percent while producer price deflation deepened, data showed on Tuesday, leaving policymakers room to keep monetary conditions easy and nurture a nascent recovery.

The National Bureau of Statistics said China's producer prices dropped 1.9 percent in March, faster than February's annual drop of 1.6 percent.

"Lower inflation will greatly ease investors' concerns that the policymakers would begin to tighten monetary conditions," Haibin Zhu, chief China economist at JP Morgan in Hong Kong, told Reuters.

Economists polled by Reuters had forecast March inflation to ease to 2.4 percent and factory gate prices to fall 1.8 percent from a year earlier.

Month-on-month consumer prices versus the market consensus of a 0.6 percent drop.

Much of the drop in the headline CPI was explained by a drop in food prices which economists say are normalizing after a seasonal spike in February caused by the Lunar New Year holiday.

The data is likely to reduce the anxiety building among some investors that China's policymakers may begin tightening monetary conditions at an early stage in the recovery cycle.

"We think the inflation outlook remains benign. If you look at the overall demand picture, China is recovering but the pace is still very gradual which means inflation is not a near-term concern," said Sun Junwei, China economist at HSBC in Beijing.

China's economy suffered its slowest year of growth for 13 years in 2012, expanding by 7.8 percent, though a fourth quarter bounce to 7.9 percent year-on-year was taken as the starting point of what is widely described as a modest recovery.

Investors expect GDP data due next week to confirm that the economy gained further traction in the first three months of 2013, with analysts in the Reuters poll forecasting that growth nudged up to 8.0 percent year-on-year.

China's central bank said last week the country's economic growth was stabilizing and that inflation was "basically stable". The bank made the remarks after holding its first-quarter monetary policy committee meeting.

But the central bank noted that future price trends bear a level of uncertainty, and that it would keep monetary conditions "stable".

(Reporting By China Economics Team; Writing by Nick Edwards; Editing by Eric Meijer)