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CORRECTED-METALS-London copper eases, nickel rallies on return from holiday

(Corrects copper milestone in 2nd para to March 19 from April 19)

* LME nickel spreads reach tightest in nearly two years,

* Coming Up: Euro zone Markit Services PMI April at 0800 GMT

SYDNEY, May 6 (Reuters) - London copper edged lower on Tuesday in thin trading as markets reopened after a long holiday weekend, while dwindling nickel supplies after Indonesia's ban of ore exports pushed that metal back towards 15-month highs.

London copper has been underpinned by steady second-quarter demand from top consumer China, although it has struggled to find momentum since dropping to its weakest since mid-2010 at $6,321 a tonne on March 19.

Still, signs that a U.S. recovery is taking hold are brightening copper's price prospects, said Chief Executive Jonathan Barratt at commodity research firm Barratt's Bulletin in Sydney.

"The market is still trying to find out the direction for copper - but we continue to see support for prices on the dip," he said.

"When you look at copper where it is, and the sort of growth we are expecting, then copper certainly is an undervalued play."

Three-month copper on the London Metal Exchange was down by 0.2 percent to $6,705 a tonne at 0718 GMT after gains of 1.1 percent from the previous session. UK markets reopened after a holiday on Monday.

The most-traded July copper contract on the Shanghai Futures Exchange slipped by 0.3 percent to 47,560 yuan ($7,600) a tonne. The ShFE was closed Thursday and Friday last week, making Tuesday the first day markets were open concurrently since last Wednesday.

Injecting some cheer into markets, growth in the U.S. services sector accelerated in April, rising at the fastest pace in eight months as new orders jumped and overall activity quickened by the most since early 2008, an industry report showed on Monday.

This helped to offset a gloomier reading on China's factory growth. Activity in China's manufacturing sector contracted for a fourth consecutive month in April, a private survey showed on Monday, adding to questions about whether the world's second-largest economy is still losing momentum.

Adding support to metals demand, more Chinese cities are rolling out measures to encourage home purchases, expanding efforts by local governments to support the cooling property market as authorities come under pressure to steady China's faltering economy.

Looking ahead, further indications will come with trade data on Thursday. Growth in China's factory output and investment likely stabilised in April as the government uses targeted policy measures to underpin growth, while the pace of declines in exports and imports may have eased, a Reuters poll showed.

In other metals, LME nickel traded up 1.6 percent at $18,565 a tonne, more than erasing Friday's losses, climbing to $18,595 and approaching a 15-month peak of $18,715 a tonne hit on April 28. Prices have climbed more than 33 percent this year.

Physical supply of nickel has stabilised in Europe as consumers slowed a burst of stockpiling triggered by fears an Indonesian export ban from January would make ore scarce, although the market is expected to swing into deficit next year as inventories dwindle.

A narrowing differential between cash and benchmark prices reflects growing appetite for spot nickel supplies that is underpinning prices. LME cash nickel <MNI0-3> traded at a $25 discount to the benchmark contract last week which was the narrowest since July 2012, and up from $53 in mid-April.

In news, miner Glencore Xstrata met market forecasts with a 24 percent increase in copper production in the first quarter of 2014 helped by production expansion at its African and Australian operations.

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 = 6.2455 Chinese Yuan)

(Reporting by Melanie Burton; Editing by Tom Hogue and Anupama Dwivedi)