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METALS-Copper, aluminum down on sluggish China, Europe business activity

* Euro zone PMI slows more than expected in August

* Aluminum spreads relax as stock returns to market

* Global refined copper market in 69,000T deficit in May -ICSG

* Chinese refined copper imports fall 16 pct in July

(Adds details, quotes; previous dateline Sydney)

LONDON, Aug 21 (Reuters) - Copper, aluminum and other base metals fell on Thursday after downbeat data on business activity in China and Europe, but investors were cautious about selling just a day after some were forced to bail out of short positions.

Three-month copper on the London Metal Exchange lost 0.4 percent to $6,979.50 a tonne by 0951 GMT, with the market taking a breather after jumping 2.1 percent the session before, when it hit its highest in eight days at $7,027.50.

Wednesday's move wrong-footed many bearish investors as stops were hit, forcing them to buy back bets on falling prices.

"In the very short term, yesterday's rally probably made some people sensitive about selling too aggressively today, so there's some caution in the air," said analyst Vivienne Lloyd at Macquarie in London. But she expected copper to head down again.

"We think it's going to be lower for the rest of the second half of the year because not only do you have the impact of the Qingdao probe, but you've got a softening environment in China, higher supply and weaker demand growth from this point," Lloyd said.

A 16 percent decline in Chinese refined copper imports in July showed the impact that a probe of suspected fraud at China's Qingdao port was having on metals financing, she added.

Concern about Chinese growth deepened after data showed that manufacturing activity hit a three-month low in August, raising the case for new policy steps to keep growth on track.

China is the world's biggest copper user, accounting for around 40 percent of refined demand, for which housing and its related sectors such as white goods account for more than half.

"On the demand side we see a very soft picture in China. We have concerns about the property market and although we see loosening policies, we don't think that's enough to stimulate demand," Standard Chartered analyst Judy Zhu said in Shanghai.

ALUMINUM ON SHAKY GROUND

Other economic news was also gloomy as a Reuters poll showed Japan's economic recovery was likely to be modest despite a small acceleration in the factory sector and in the euro zone, a survey showed private business growth slowed more than expected in August.

More supply was expected after Freeport-McMoRan Inc's Indonesia unit resumed copper concentrate shipments this month after a seven-month hiatus.

"You can see the impact of supply already on copper prices," a concentrates trader said.

The global world refined copper market showed a 69,000 tonne deficit in May, compared with a 186,000 tonne deficit in April, the International Copper Study Group (ICSG) said in its latest monthly bulletin.

Aluminum fell 0.1 percent to $2,073 a tonne after hitting a 20-month top on Wednesday, as reviving consumer demand fights for limited supply.

Paul Adkins at consultancy AZ China said aluminum prices have risen too fast and were likely to retreat. "What is clear is that they (investors) have jumped the gun. Today's flash PMI reinforced that," he told the Reuters Global Base Metals Forum.

"China's economy is by no means a sure bet, and with sectors like housing starts and national grid investment falling off the pace, there's still plenty of shaky ground ahead for aluminum."

More than 100,000 tonnes of aluminum that had been jammed in a queue for delivery out of Vlissingen warehouses returned to stocks, which traders suggested was a party delivering against a short position, given the August expiry. 0#MALSTX-LOC-GRD>

This has relaxed immediate supply stress in the LME aluminum forwards curve. Cash aluminum had traded this week at its narrowest discount of $1.25 against the benchmark since December 2012 but has since eased to $12.

PRICES

Three month LME copper

Most active ShFE copper

Three month LME aluminum

Most active ShFE aluminum

Three month LME zinc

Most active ShFE zinc

Three month LME lead

Most active ShFE lead

Three month LME nickel

Three month LME tin

(Additional reporting by Melanie Burton, editing by David Evans)