GLOBAL ECONOMY-Manufacturing points to challenges for world economy

* U.S. ISM manufacturing index posts surprise rise into growth

* U.S. factory growth remains tepid, falling export orders hurts

* Manufacturing in euro zone and Asia wilts in Sept * Slow growth, uncertainties buffeting global economy

(Recasts, adds comment, detail on Brazil, Mexico, Canada)

By Steven C. Johnson

NEW YORK, Oct 1 (Reuters) - U.S. manufacturing unexpectedly grew last month for the first time since May but euro zone factories suffered their worst quarter since early 2009 and China lost steam, suggesting the global economy faces hurdles as it tries to outrun recession.

The data showed companies across the world have yet to benefit much from government and central bank efforts to stimulate growth.

In Europe, manufacturing activity fell to levels not seen since early 2009 during the darkest days of the worst recession since World War II. The contraction suggested the 17-country euro zone could struggle to avoid falling back into recession.

Factory activity in China also contracted, in a sign the world's No. 2 economy lost momentum for a seventh consecutive quarter. China has been a crucial engine of global growth.

Growth in the United States has been firmer than elsewhere, though the world's largest economy remains hobbled by high unemployment. Economists say $600 billion of automatic spending cuts and tax increases due in January unless Congress delays them have made matters worse by leaving firms reluctant to hire.

Now some worry that U.S. manufacturing, a bright spot in 2011, may be acting as a negative influcence on growth. While a jump in new orders nudged the Institute for Supply Management's (ISM) index of national factory activity up last month, ending three months of contraction, it remained well off levels seen in early 2012.

Markit's Eurozone Manufacturing Purchasing Managers' Index (PMI) rose to 46.1 from 45.1 in August, though September marked the 14th month of overall contraction in the sector.

Tepid demand in Europe hurt Asian factory output. China's official manufacturing purchasing managers' index (PMI) stood at 49.8 last month, showing the sector contracted for a second straight month, though at a slower rate than in August.

A separate index on U.S. manufacturing activity from financial information firm Markit showed activity in September and over the third quarter was the weakest in three years.

Weaker demand for U.S. products, the result of recession in many European countries and slower growth in Asia, was the main drag on U.S. factory activity, the data showed.

"We're still in a low-growth, fits-and-starts type of pattern here," said Tom Simons, money market economist at Jefferies & Co in New York. "And with Europe and China and other Asian economies slowing, it's going to be pretty difficult to accelerate exports."

Paul Dales, senior U.S. economist at Capital Economics, noted that even the better-than-expected ISM reading was "still consistent with annualized GDP growth of no more than 1.5 percent to 2 percent" in the United States.

Some warn things may get even leaner. The U.S. economy grew 1.3 percent in the second quarter, and Chris Williamson, chief economist at Markit, said it may have slowed between July and September, adding that manufacturing "is now likely to be acting as a drag on the wider economy".

That could be bad news for other economies in the Americas. Growth in both Canadian and Mexican manufacturing slowed for the third straight month in September. Brazil's factory sector contracted, though at a slower pace than in August.

A JPMorgan index showed world manufacturing contracted last month, albeit at a slower pace than in August. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

Graphic - Markit PMI: U.S., euro zone and China

Graphic - U.S. manufacturing: The Institute for Supply Management's gauge of U.S. manufacturing shows the sector expanded in September for the first time in three months.



The outlook is darker in Europe, where economists say the major euro zone economies look set to shrink for months to come.

"This is something that is going to persist into the fourth quarter," said Nick Matthews, euro area economist at Nomura.

"Even when you look at some of the forward-looking (PMI) indicators as a whole, they're still extremely weak for the area as a whole. The position still looks extremely vulnerable."

Unemployment in the euro zone stayed at a record high in August, as official data on Monday further highlighted the human cost of the bloc's three-year debt crisis.

The surveys did little to alter the view among economists that central banks in Europe will likely have to take more action to boost their flagging economies, although probably in November rather than this week.

In Britain, manufacturing shrank in September as export orders fell and costs soared, suggesting the Bank of England will extend asset purchases in November.

The contraction in Chinese manufacturing probably means China's economy suffered a seventh straight quarter of slowing growth, economists said.

"The data continues to reinforce the hard landing that we have predicted for China, because this is the second consecutive month of a sub-50 reading," said Prakash Sakpal of ING in Singapore, which forecasts China's economic growth will be close to 7 percent in both the third and fourth quarters of this year.

Two interest rate cuts, looser bank reserve requirements that cleared some 1.2 trillion yuan ($190 billion) for lending and more than $150 billion of infrastructure projects have as yet failed to arrest the decline in China's overall growth.

In Japan, the quarterly Bank of Japan "tankan" survey of business sentiment reflected the central bank's view that growth will stall between now and March 2013.

Taiwan's PMI fell to its lowest in 10 months and South Korea reported a small year-on-year decline in exports.

"It will take a while longer until global demand shows signs of stabilization," said Saktiandi Supaat, foreign exchange research head at Maybank in Singapore.

(Editing by Clive McKeef and Andrew Hay)

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