ZURICH, Aug 20 (Reuters) - Demand for Swiss watches slipped 26 percent, in July, in line with the average drop seen in the first six months of the year, but recovering slightly from the 32 percent fall in the previous month.

The value of sales dipped to 1.19 billion Swiss francs ($1.11 billion), as the total volume of exports fell 600,000 units.

The industry, home to Swatch Group (UHR.VX), the world's largest watchmaker, and luxury goods group Richemont (CFR.VX), is facing its most severe drop in demand in some twenty years as consumers spend less on luxury items due to worries about job losses and the shrinking value of their portfolios.

"Exports to Hong Kong were sharply lower. The fall was still more sustained in the United States, as had been the case in previous months. The main European markets continued to hold up more strongly," the Swiss Watch Federation said in a statement on Thursday 20 August.

But there are signs that the decline in demand may be easing and last week Swatch Group (UHR.VX), the world's largest watchmaker, sounded an optimistic note about the rest of 2009 as retailers had started to order watches again.

"Given comments from the sector, the data looks poor -- particularly from Hong Kong and China where I assumed that things would start to improve," said Kepler Capital Markets analyst Jon Cox.

"There are no positives to takeaway from the data. Still, I expect emerging market countries to turn positive before the end of the year," he said.

Many retailers stopped ordering new products to run down stock built up during the boom years, while some struggled to get the necessary credit to buy goods after markets tightened. (Reporting by Katie Reid; Editing by Dan Lalor) ($1 = 1.076 Swiss francs)