(Adds previous outlook, Ifo institute's survey, companies results, additional quote in paragraphs 2, 6-8 and 10)

BERLIN, March 15 (Reuters) - Germany's chemicals association expects sector revenue to fall 3.5% this year and production to stagnate at a low level, it said on Friday, citing high production costs and weak demand.

In December, the VCI association had predicted a 3% drop in 2024 revenue.

The chemicals sector, Germany's third-largest industry employing roughly half a million workers, is struggling, with customers reluctant to place new orders amid prolonged economic uncertainty and still-high raw materials and energy prices.

The association said producer prices were likely to continue falling but with domestic orders not showing a significant improvement, it was pinning its hopes on customers in the United States and China.

"Since February, individual companies have reported a slightly improved order situation – especially abroad," VCI General Manager Wolfgang Grosse Entrup said in a statement.

On Tuesday, the Ifo economic institute also pointed to "surprising rays of hope" as its business climate barometer for industry unexpectedly improved in February, with demand rising for the first time in two years as energy and raw material prices stabilized.

However, business expectations turned pessimistic again, the institute added.

Top chemicals sector players like BASF, Evonik , and Lanxess have recently announced job cuts and writedowns, while Covestro became a takeover target last year.

Industry sales fell around 12% last year to 229 billion euros ($249 billion), while production dropped almost 8%, VCI said.

"Last time we saw such a low figure almost 30 years ago," Grosse Entrup said. Back then, Germany was still dealing with economic problems after its reunification.

($1 = 0.9183 euros) (Reporting by Riham Alkousaa, Patricia Weiss, and Andrey Sychev; Editing by Kirsten Donovan and Mark Potter)