By Michelle Martin BERLIN (Reuters) - Foreign trade propelled growth in Europe's largest economy in the fourth quarter while domestic demand, which had been a key growth driver throughout the rest of the year, was a drag. Seasonally-adjusted data from the Federal Statistics Office on Tuesday confirmed an earlier flash estimate showing German gross domestic product (GDP) increased by a modest 0.4 percent on the quarter between October and December compared with 0.3 percent during the previous three months. A detailed breakdown showed domestic demand subtracted 0.7 percentage points from growth while foreign trade, which had been weak for much of 2013, added 1.1 percentage points to GDP. The statistics office said the domestic economy sent "mixed signals". Capital investment picked up significantly, big inventory reductions slammed the brakes on growth and public expenditure was stagnant while private consumption dipped. Recent sentiment indicators have been upbeat but hard data has been more subdued, raising doubts about the strength of the economy's actual performance. But economists expect domestic demand to gain momentum this year and Berlin is relying on it to drive a predicted 1.8 expansion while foreign trade is expected to dampen growth. "High job security and rising incomes as well as very low inflation have been boosting consumer confidence to record highs lately and should translate into stronger household spending growth in 2014," said Christian Schulz at Berenberg Bank. "The sharp fall in inventories may even trigger a bounce-back in the first quarter of 2014 if inventories are replenished," he added. Last week data showed real wages in Germany fell in 2013 for the first time in four years but Nordea economist Holger Sandte said real income was likely to develop more positively this year so there was a good chance private consumption would pick up. Workers are expected to get strong wage hikes and benefit from record employment levels and moderate inflation, while low interest rates give them little incentive to save. The Economy Ministry has said it expects private households to spend considerably more on consumption and home building this year due to those favorable conditions. The German economy was a growth locomotive during the early years of the euro zone crisis but its performance has weakened over the last two years, and in 2013 it grew at its slowest pace since the global financial crisis. Recent surveys have shown increases in consumer and business morale, suggesting the economy will gather speed in early 2014. But the latest hard data has painted a more gloomy picture, with exports, industrial output and orders all falling in December. That has prompted some economists to warn that the economy is not faring as well as the forward-looking "soft" surveys suggest. The data confirmed an earlier flash estimate showing Germany's gross domestic product was up 1.3 percent on the year in the fourth quarter. Separately, the statistics office said on Tuesday that the German federal, state and municipal governments together achieved a surplus of 0.3 billion euros last year - equivalent to 0.0 percent of its GDP. It therefore comfortably met the Maastricht criteria that say euro zone countries are supposed to have deficits of no more than 3 percent of GDP. (Additional reporting by Rene Wagner; Editing by Madeline Chambers and Jon Boyle)