Japanese retail sales fell in March at the fastest annual pace since 1998 and could remain weak for some time as last month's earthquake, radiation leaks from a damaged nuclear reactor and fears of electricity shortages weigh on consumer sentiment.

The data, the first measure of consumption since the natural disaster on March 11, highlights the need for the government to quickly resolve the nuclear crisis, ensure power supply and help manufacturers restore damaged supply chains so they can produce more goods.

The government will submit to parliament this week its first spending package worth almost $50 billion to rebuild the battered northeast coast after the earthquake, but it will need to spend a lot more in order for the economy to recover.

The worst will be over for consumption after April but it will take a long time before it returns to pre-quake levels, said Tatsushi Shikano, senior economist at Mitsubishi UFJ Morgan Stanley Securities.

Recovery from here will depend on the pace of increase in output and corporate activity. If output bottoms out as expected in March-April, consumption will follow with a lag in recovery of consumer sentiment as well as the job market and income conditions.

Japanese retail sales fell 8.5 percent in March from a year earlier, more than a median market forecast for a 5.6 percent annual decline, trade ministry data showed on Wednesday.

That marked the biggest year-on-year fall since a 14.3 percent decline in March 1998, after the government raised the sales tax to 5 percent from 3 percent.

Compared with the previous month, retail sales fell 7.8 percent in March, following a 0.8 percent rise in February.

Japan is facing its worst crisis since World War Two after a 9.0 magnitude earthquake and tsunami battered its northeast coast on March 11, leaving nearly 28,000 dead or missing and triggering radiation leaks at a nuclear power plant.

The government estimates material damage to cost $300 billion, making it by far the world's costliest natural disaster.

Data due this week is forecast to show a record decline in industrial production as car makers slashed production after the earthquake due to a shortage of parts and damaged factory lines.

Japan's economy is expected to contract in the current quarter after the earthquake and tsunami but will grow again in July-September on reconstruction efforts, a Reuters poll showed. Some economists say gross domestic product may have contracted in January-March, meaning three straight quarters of contraction to June cannot be ruled out.

(Additional reporting by Tetsushi Kajimoto; Editing by Chris Gallagher)