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METALS-London copper slips as China factory growth contracts

* Japan considers taking Indonesia to WTO over minerals ban- report

* Producer selling seen in zinc; chart picture turns negative - broker

* Coming Up: Euro zone Markit Manufacturing Flash PMI; 0858 GMT

(Adds comment, detail, updates prices)

SYDNEY, Feb 20 (Reuters) - London copper slipped on Thursday after a preliminary survey of China's manufacturing sector showed it contracted in February, although analysts said the Lunar New Year break was partly responsible for the bleak reading.

Activity in China's factories shrank again in February as employment fell at the fastest pace in five years, the private survey showed, dimming the outlook for demand from the world's top metals consumer.

Three-month copper on the London Metal Exchange dropped 0.60 percent to $7,137 a tonne by 0256 GMT, after easing slightly in the previous session.

Copper prices reached their highest since Jan. 27 at $7,220 on Wednesday, but failed to hold their momentum.

The May copper contract on the Shanghai Futures Exchange fell 0.6 percent to 50,450 yuan ($8,300) per tonne.

"Markets are pretty sensitive to bad news coming out of China, and they probably should be given its role as a major purchaser of copper," said economist James Glenn of National Australia Bank in Melbourne.

"Our view is a continued ebbing of growth."

The flash Markit/HSBC Purchasing Managers' Index (PMI) fell to a seven-month low of 48.3 in February from January's final reading of 49.5. A reading below 50 indicates a contraction while one above shows expansion.

The Lunar New Year festival, which began on Jan. 31 and covered early February, likely affected factory output as manufacturers shut shop for China's biggest annual holiday.

Weak U.S. economic data also weighed on market sentiment.

U.S. housing starts posted the biggest drop in almost three years in January, the latest suggestion that a brutally cold winter was putting a big dent in the economy.

Still, three Federal Reserve officials on Wednesday said they believed the U.S. economy was gaining traction despite a recent slowdown from cold weather, allowing the central bank to stick to its plan to wind down its massive bond-buying stimulus this year.

Withdrawal of liquidity has tarnished the allure of metals, as the industry will have to pay more to manufacture and there is less cheap capital available for investors.

In other metals, zinc prices have come under pressure as producers sell into the recent rally while the metal's chart picture has also turned negative, broker Triland said in a note, late on Wednesday.

"We should see a further down correction tomorrow."

LME nickel dropped for the first time in five sessions. But prices are still up almost 3 percent for the month, underpinned by major supplier Indonesia's ban on mineral exports that was enforced in mid-January.

Japan is preparing to take Indonesia to the World Trade Organisation over the ban on exports of mineral ores, the Nikkei business daily said on Thursday.

The Japanese government is set to seek talks with Indonesia through the WTO this month, the report said, without citing sources. If the issue was not resolved, Japan would request that a panel be appointed to look into the case, it added.

PRICES

Three month LME copper

Most active ShFE copper

Three month LME aluminium

Most active ShFE aluminium

Three month LME zinc

Most active ShFE zinc

Three month LME lead

Most active ShFE lead

Three month LME nickel

Three month LME tin ($1 = 6.0764 Chinese yuan)

(Editing by Himani Sarkar)