(Corrects paragraph six to real inflation being interest minus inflation)
By Carolyn Cohn
LONDON, Feb 3 (Reuters) - Emerging stocks dipped on Monday, adding to two loss-making weeks, dragged further down by Chinese data.
Hungarian assets fell on worries about the country's high debt levels. A debt auction last week had to be cut short.
With many Asian markets, including China, still shut for the lunar new year holidays, trading volumes stayed thin. But China's official Purchasing Managers' Index (PMI) dipped in January, showing growth slowing in manufacturing as well as services.
That is likely to weigh on emerging markets that export to China, and MSCI's main emerging equity index eased 0.3 percent after January's 6.6 percent loss.
"The question is at which point the weakening process will fade and we see normalisation," said Luis Costa, emerging markets strategist at Citi.
"We don't think we're there yet. The process of establishing real rates (interest minus inflation) in emerging markets is half-way through and we may see further interest rate hikes."
India, South Africa and Turkey all raised interest rates last week, and markets are speculating Hungary may also need to hike.
Polish stocks and the zloty rallied after PMI data showing Polish manufacturing grew at the fastest pace in three years last month, while Czech activity expanded for the eight month in a row.
Hungary's PMI at 58.9 was far above the 52.4 average of the past three years, but stocks fell 1 percent and the currency dropped towards two-year lows hit last week.
Hungary is considered one of the central European economies most exposed to contagion from the emerging market sell-off, due to high debt levels and an aggressive rate cutting cycle that has taken interest rates to a record low 2.85 percent.
"Hungary is being challenged by the market," said Costa. "Markets are already hiking on behalf of central banks. It becomes a vicious cycle."
Russia's rouble approached five-year lows after data showing Russian manufacturing shrinking for the third month in a row. South Africa's PMI also stayed below the 50 threshold that denotes expansion.
The Ukrainian hryvnia fell half a percent to fresh four-year lows as embattled President Viktor Yanukovich returned to work after four days of sick leave.
Ukrainian five-year credit default swaps rose 13 basis points to 1,050 bps, according to Markit, their highest since mid-December, before Ukraine got a Russian bail-out.
In Asia, Seoul stocks fell more than 1 percent after the China data, and in a delayed response to a further cut in stimulus by the U.S. Federal Reserve after a holiday closure, even though local PMIs at eight-month highs indicated signs of a growing export-led recovery. The won had its worst day in 7-1/2 months.
Thai stocks rose 1.5 percent, after elections went ahead more peacefully than expected, but the baht gave up some of its earlier gains as anti-government protesters ignored Sunday's vote and continued efforts to topple Prime Minister Yingluck Shinawatra.
Emerging sovereign debt spreads tightened 2 basis points to 397 bps over U.S. Treasuries, after widening 50 bps last month.
"The combination of weakening Chinese data and the gradual turn in Fed policy will continue to fuel negative sentiment," said strategist Kit Juckes at Societe Generale in a note.
"Flows of money into EM since 2010 have been huge. The path back towards any kind of neutral Fed policy stretches ahead of us and the Chinese economic slowdown is no flash in the pan. So the drivers of the current turmoil aren't going to go anywhere and any respite is likely to be temporary."
For GRAPHIC on emerging market FX performance 2014, see link.reuters.com/jus35t
For GRAPHIC on MSCI emerging index performance 2014, see link.reuters.com/weh36s
For GRAPHIC on MSCI emerging Europe performance 2014, see link.reuters.com/jun28s
For GRAPHIC on MSCI frontier index performance 2014, see link.reuters.com/zyh97s
For CENTRAL EUROPE market report, see
For TURKISH market report, see
For RUSSIAN market report, see ) (Reporting by Carolyn Cohn, Sujata Rao and Natsuko Waki Editing by Jeremy Gaunt)