May 20 (Reuters) - Quarterly sales in Germany's chemical industry grew 1.8% from last year, helped by higher demand and pull-forward effects from U.S. customers stocking up, industry lobby VCI said on Tuesday, but warned the negative market sentiment would keep weighing on the sector.

High production costs and increasing bureaucracy in Germany, on top of a stagnating economy, have put a strain on the industry, with U.S. tariffs worsening the overall picture.

Sector-wide sales rose to 54.8 billion euros ($61.73 billion) in the first quarter, and were also up 4.4% compared to the prior quarter, VCI said.

The chemicals association confirmed its yearly forecasts for Germany's third largest industry, despite uncertainty in the market.

It said the sector had benefitted from high demand in the first three months of the year, as customers stocked up before U.S. President Donald Trump imposed his sweeping tariffs.

But the Trump administration's volatile tariff policy has since diminished export opportunities for the chemical industry and its customers, VCI said in a statement.

In addition, there are fears that Chinese goods might be diverted towards Europe due to tariffs, increasing pressure from imports, it said.

Trump's tariffs and uncertainty over his trade policies and China's retaliation have sent global markets into a tailspin and significantly dampened investors' economic optimism.

However, VCI said that if the trade conflict does not escalate further and the German federal government launches its announced growth package, the industry outlook could brighten as early as this year.

Lower energy prices, a rapid reduction in bureaucracy and a tax reform are among the needs of the sector, VCI President and Covestro 1COVG.DE CEO Markus Steilemann said in the statement.

"We now have a stable government again, that holds all the cards in its hands," Steilemann said.

($1 = 0.8877 euros)

(Reporting by Isabel Demetz and Ozan Ergenay in Gdansk, editing by Milla Nissi-Prussak)

((Isabel.Demetz@thomsonreuters.com;))