* May home prices ease from April, first fall in two years
* Prices still up 5.6 pct on year but slowest gain in 13 months
* Spreading price weakness adds to other signs of cooling in property
* No signs of price collapse now but growing risk to economy (Adds comments)
By Xiaoyi Shao and Koh Gui Qing
BEIJING, June 18 (Reuters) - China's average home prices fell for the first time in two years in May and price weakness spread to more major cities, adding to signs of cooling in the property market which are posing a growing risk to the broader economy.
The 0.2 percent monthly price drop in May, though slight, follows data last week that showed growth in property investment slowed while property sales and new construction tumbled, compounding the challenges for leaders in Beijing as they deal with an economic growth slowdown.
The real estate sector, which accounts for more than 15 percent of China's economic output and directly impacts around 40 other business sectors, could determine the severity of that downturn.
"If the cooling-off in real estate continues, the authorities will need to make more effort to manage the slowdown in the broad economy," said Lv Fengyong, a researcher at the Chinese Academy of Social Sciences (CASS), a government think-tank in Beijing.
Analysts said large inventories of unsold homes and recent sluggish sales are likely to trigger wider and deeper price cuts in coming months, as developers act to maintain cash flow. However, they said evidence of a sharp correction in home prices remains thin, putting to rest for now at least fears of a hard landing in the wider economy.
"The high inventories in some cities and developers' recent promotions, together with unclear market expectations that kept buyers staying on the sidelines, led the prices to fall," Liu Jianwei, a senior statistician at the National Bureau of Statistics (NBS), said in a statement accompanying the data on Wednesday.
New home prices fell in May from April in 35 of the 70 cities polled, up from eight cities in April. (For table with more price data, see )
Versus a year ago, new home prices rose 5.6 percent in May, easing from the previous month's 6.7 percent rise and the slowest annual rise in 13 months.
The worst year-on-year performance was in the eastern city of Wenzhou, where prices fell 4.4 percent in May.
A recent private survey showing China's vacancy rates were around 22 percent suggest a considerable overhang of inventory, which could undermine property as an investment class and add momentum to price declines. With its stock markets in a prolonged slump, property has been one of the few investments in China to offer attractive returns.