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* China factory activity shrinks in May -Caixin PMI
* Australian dollar slips to lowest in nearly 3 weeks
* Sterling dips after poll shows slimmer lead for PM May (Updates prices, adds comments)
By Masayuki Kitano
SINGAPORE, June 1 (Reuters) - The Australian dollar tumbled on Thursday after a private survey showed China's manufacturing activity unexpectedly shrank in May, casting a cloud over the global economic outlook.
The Caixin/Markit Manufacturing Purchasing Managers' index (PMI) fell to 49.6, indicating a contraction for the first time in 11 months and coming in below market expectations.
The Caixin report, which tends to focus on smaller firms, contrasted sharply with official readings on Wednesday that had shown steady manufacturing growth in China.
The Australian dollar slid 0.5 percent to $0.7396. The Aussie slipped to $0.7384 at one point, its lowest level since May 12.
"There have been signs of increased unsteadiness in China's economic conditions, starting from May onwards," said Masashi Murata, currency strategist for Brown Brothers Harriman in Tokyo.
Whether this unsteadiness would shake investor confidence in the global growth outlook in the second quarter would become a focus for market participants, Murata said, noting that emerging Asian currencies could come under pressure if confidence wavers.
China's yuan remained firm even after the weak factory activity reading.
The onshore Chinese yuan touched its highest level against the dollar in nearly seven months after China's central bank set the yuan midpoint at the strongest level since November.
The yuan added to the gains made on Wednesday, when it rallied on views that China's central bank is now less inclined to allow the currency to weaken markedly against the U.S. dollar.
The onshore yuan rose to as high as 6.7878 per U.S. dollar, its highest level since November.
The offshore yuan rose to 6.7245 per dollar at one point, its strongest level since October.
A key resistance level for the offshore yuan was at levels around 6.70 per dollar, said Christopher Wong, senior FX strategist for Maybank in Singapore.
Other than the weakness in the Australian dollar, moves among major currencies were relatively subdued.
Sterling eased 0.1 percent to $1.2881, edging away from Wednesday's intraday high of $1.2921, after a poll showed a slimmer lead for Prime Minister Theresa May's ruling party before next week's election.
The latest YouGov poll for The Times on Wednesday showed that May's Conservative Party is only 3 percentage points in front of the opposition Labour Party with the election just a week away.
Sterling had bounced back from $1.2770 touched on Wednesday, its lowest level in more than a month, after two other surveys showed May's poll lead in double digits, countering signs she might fall short of a majority in next week's election.
The euro held steady on the day at $1.1247, staying within sight of last week's 6-1/2 month high of $1.1268.
The dollar edged up 0.1 percent against the yen to 110.92 .
Recent falls in U.S. bond yields have weighed on the greenback, analysts said.
Investors have been fretting that political turmoil in Washington could hamper President Donald Trump's planned tax cuts and other promised stimulus measures.
The Trump administration is under investigation by the Federal Bureau of Investigation and several congressional panels over alleged Russian meddling in the 2016 presidential election and potential collusion with the Trump campaign. (Reporting by Masayuki Kitano; Editing by Shri Navaratnam and Eric Meijer)