UPDATE 1-Chile's economy contracts more than expected in January as COVID-19 rebounds

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(Adds analyst comments, data from bank release, background)

SANTIAGO, March 1 (Reuters) - Chile's economic activity fell 3.1% in January from the same month a year ago, the central bank said on Monday, as a rebound in cases of the coronavirus dragged on the service and manufacturing sectors.

The bank's IMACEC economic activity index encompasses about 90% of the economy tallied in gross domestic product figures.

The sharp year-on-year fall was more severe than market expectations for a contraction of around 1%, according to a central bank poll in February.

Construction and manufacturing output both dropped off in January versus the same period the previous year, the bank data showed, as the world's top copper producer struggled to reboot to 2020 levels following months of economic hardship.

Commerce, however, remained a bright spot, bolstered by citizens flush with cash following the passage in Congress late in 2020 of a bill allowing Chileans a second withdrawal from pension funds.

The bank also noted the economy had grown 1.3% versus December, despite increased restrictions on travel and movement amid a spike in cases following the end-of-year holidays.

Sebastian Diaz, an analyst with Pacifico Research in Chile, said that though the numbers fell short of predictions, there was still room for optimism in the coming months.

"The high price of copper, advances in the vaccination process, the increase in mobility and the continuation of stimulus measures both locally and globally, leads us to significantly revise our upward growth projections," Diaz said.

Chile has jumped ahead of the rest of Latin America and many countries globally with its inoculation program. The country has already inoculated 3.35 million of its 19 million citizens against COVID-19, officials said on Monday.

(Reporting by Dave Sherwood in Santiago Editing by Toby Chopra and Matthew Lewis)