* HY cash earnings of A$3.55 bln in line with consensus

* Home loan competition easing but margins still low

* Raises buy back program to A$3bln with fresh A$1.5 bln

May 2 (Reuters) - National Australia Bank posted a double-digit drop in first-half earnings on Thursday but talked up the strength of the economy and said a margin-crunching struggle for the vital home loan market showed signs of easing.

The first of Australia's big four banks to front up to investors this reporting season, NAB's results were closely watched for signs that the squeeze on profits from tough mortgage and deposit competition is coming to an end.

Cash earnings for the six months ended March 31 fell 13% versus a year earlier to A$3.55 billion ($2.32 billion) as costs for the nation's second-biggest mortgage lender rose and competition tightened margins.

However, the bank pointed to the shallower 3.1% quarter-on-quarter fall as evidence pressure was moderating, with margins on new home loans to new customers rising over the past quarter.

Shares were up 1.7% to A$34.4 just before lunch.

NAB also announced it would double a buy-back program begun last August to A$3 billion.

CEO Andrew Irvine, who took the reins last month, said the economy was performing better than expected and many industries including mining, manufacturing and healthcare were still growing strongly.

"We overemphasize the difficulties in our economy and those that are struggling and under-emphasize the portions of our economy that are doing well," he said. "There are large parts of our economy ... doing really really well."

Business loans rose 8.6%, an "astonishing" result and a sign of the economy's strength, said Irvine, who was previously the head of the division - Australia's largest business lender.

The bank forecasts economic growth to hit 1.7% this year and accelerate to trend growth of 2.25% in 2025. Like markets, it expects a first rate cut by November.

However, there were signs of the continuing stress for some customers, including first time buyers, with the share of impaired loans and those more than 90 days late rising to 0.79%, the highest level since 2022.

A rise in borrowing costs and increased competition for lending have prompted banks to cut rates on loans despite having to pay depositors more interest, squeezing their margins.

NAB's net interest margin - a closely watched key measure of profitability - fell to 1.72% from 1.77% a year earlier, but still beat the Visible Alpha consensus estimate of 1.69%.

Jarden analysts said the beat was mostly due to strong performance in the Markets and Treasury division, but the results still showed that mortgage and deposit competition in the sector was easing.

Cash earnings were in line with Visible Alpha's consensus estimate of A$3.55 billion compiled by UBS, but below last year's A$4.07 billion.

NAB raised its interim dividend by 1 cent to 84 Australian cents per share.

($1 = 1.5323 Australian dollars) (Reporting by Sameer Manekar and Poonam Behura in Bengaluru; Editing by Anil D'Silva and Shri Navaratnam)