GLOBAL ECONOMY-World economic recovery struggling to gain traction
* China PMI dips to 7-month low
* Euro zone PMI retreats from 31-month high
* U.S. regional factory survey falls, national index rises
By Jonathan Cable and Steven C. Johnson
LONDON/NEW YORK, Feb 20 (Reuters) - Another month of slower factory activity in China and a sharp decline in a closely watched gauge of U.S. manufacturing on Thursday added to concern about the state of the global economy.
Surveys also showed business activity across the 18-country euro zone slowed this month, confounding expectations of an acceleration.
U.S. stocks edged higher, however, as investors continued to shrug off tepid data while stocks in Europe recouped earlier losses, though sentiment remained fragile.
Investors were also concerned about minutes of the Federal Reserve's most recent meeting, released on Wednesday, which showed the U.S. central bank was set to keep winding down its stimulus spending despite recent softer economic data.
"While we expect the recovery to continue during the course of this year, the market remains volatile in the near-term as investors are nervous on the back of the U.S. tapering story," Henk Potts, equity strategist at Barclays Wealth, said.
Fears that the U.S. economy had lost some momentum in the new year after a strong finish to 2013 were reinforced by a decline in the Philadelphia Federal Reserve Bank's business activity index to -6.3 from 9.4 in January. A reading above zero indicates expansion in the region's manufacturing.
Some attributed the sharp decline in the index to recent winter weather, but that did not dispel concerns entirely.
"This number is a disaster," said Douglas Borthwick, a managing director at Chapdelaine Foreign Exchange. "While weather may have played a part, it comes on the back of horrible durable goods, payroll, retail sales and housing" data.
The Philly Fed survey is one of the first monthly indicators of the health of U.S. manufacturing leading up to the national report by the Institute for Supply Management.
A separate index from Markit, however, showed factory activity across the United States accelerated at its quickest pace in nearly four years in early February, handily beating expectations in a Reuters poll.
That helped ease some concern in financial markets. Paul Zemsky, head of asset allocation at ING Investment Management, said the data may have been impacted by short-term factors but added "it certainly is a good number."
In China, activity in the vast factory sector fell to a seven-month low of 48.3 this month from 49.5 in January, according to the flash Markit/HSBC purchasing managers' index.
Some analysts warned that the recent Lunar New Year holidays may have affected the result, but the sub-50 reading indicated a contraction in the sector and reinforced worries that the world's second largest economy was slowing down. That could have knock-on effects in emerging markets and the European Union.
"We had poor data from China but the question there is how impactful the deleveraging will be," Zemsky said. "This would indicate it is deflating slowly, which is not bad, but they're a big economy and we need it to grow."
EUROPE AT RISK
The euro zone may have the most to worry about, said Lena Komileva, economist at G+ Economics.
The economic bloc, she said, "is most at risk of a global demand shock given the chills emanating from China's deleveraging across emerging markets, North America's current 'frozen' growth patch and the fact that the U.S. is exporting less of its growth to the rest of the world."
Markit's Eurozone Composite PMI, which is based on surveys of thousands of companies and considered a good guide to growth, dipped to 52.7, below January's 31-month high of 52.9.
A Reuters poll had called for a modest rise.
The overall index masked news France is lagging far behind its European peers, pouring cold water on hopes for a recovery there that had gathered momentum after its economy expanded 0.3 percent in the fourth quarter.
"The story behind the euro zone PMIs remains one of an increasingly fragile recovery under way amid growing divergence between the union's largest economies, global growth headwinds and persistent euro strength," Komileva said.
Still, Markit said the latest data point to 0.5 percent economic growth in the bloc this quarter.
The region still faces falling prices, however, with inflation dropping unexpectedly to just 0.7 percent in January,
That has increased pressure on the ECB to consider new policy measures to support a recovery that appears to be running out of steam.
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