(Adds details, background on economy)

* Feb core orders fell 9.8 m/m vs f'cast -1.5%

* Core orders +4.3 yr/yr vs f'cast +14.5%

By Kantaro Komiya

TOKYO, April 13 (Reuters) - Japan's core machinery orders fell more than expected in February to extend a decline for the second month, government data showed, as firms held off on investments amid a squeeze on profits caused by the rising costs of energy and raw materials.

Core machinery orders, a highly volatile leading indicator of capital spending in the coming six to nine months, fell 9.8% in February from the previous month, the Cabinet Office data showed on Wednesday.

That compared with a drop of 1.5% forecast by economists in a Reuters poll and followed January's decrease of 2.0%.

The government downgraded its assessment of the machinery orders, saying the recovery was stalling.

In a year-on-year basis, core orders rose 4.3% in February, the data showed, much lower than a 14.5% rise expected by economists.

Rattled by supply disruptions and soaring production costs, Japanese business confidence worsened in the first quarter for the first time in nearly two years, a Bank of Japan survey showed this month.

Managers of major Japanese firms expected the near-term recovery outlook to stay modest at best, on uncertainties such as the Ukraine crisis and its impact on commodity inflation, a Reuters poll showed on Wednesday.

Economists have cut projections for the world's third-largest economy, in view of the heightening inflationary pressures on households and businesses. (Reporting by Kantaro Komiya; Editing by Clarence Fernandez & Shri Navaratnam)