Asian factory output powered ahead in December to underline emerging markets' lead in the global recovery although data showed an increasing inflation threat in the region even as growth is tepid in developed economies.

Purchasing managers' indexes in both China and India fell but also showed that the pace of factory output was still expanding solidly. The sectors in both countries have been growing for close to two years.

South Korea's factories posted their strongest growth in December in seven months.

The U.S. purchasing managers' index (PMI) due to be released later is forecast to rise slightly to 56.9 in December from 56.6 the previous month, which would provide further evidence that the country's recovery is gaining traction.

Early figures from Europe showed Ireland and Spain -- two countries under pressure over high debt levels -- ended the year on a strong note. Ireland's PMI hit its highest level since May and Spain's index rose off the back of its strongest monthly surge in foreign orders in over a decade.

A euro zone PMI is due around 0900 GMT, but is expected to be flat as the region tackles its debt woes.

Overall, the manufacturing sector is picking up momentum once again, notwithstanding China's PMI easing a bit -- but that number is still above 50, said Rob Subbaraman, economist at Nomura in Hong Kong.

After a bit of inventory build-up around mid-2010, in recent months there have been signs IP (industrial production) and exports are gathering steam again. It is partly due to overseas demand, and partly due to the inventory overhang easing, he said.

Emerging economies, such as China and India, have revived from the global financial crisis much faster than developed countries, raising expectations of two-tier global growth.

Huge public debt in developed economies, used for stimulus spending during the crisis, could weigh on their growth for some years to come, analysts say, while in comparison emerging markets' fiscal positions are relatively healthy.

Reflecting emerging markets' economic strength, Singapore on Monday said its economy grew at an annualized rate of 6.9 percent in the fourth quarter and 14.7 percent in all of 2010.

Indonesia said its consumer price index (CPI) rose to nearly 7 percent in December from a year earlier.

Both figures beat forecasts and highlighted the risk that Asia's growth may come at the cost of tighter monetary policy.

For Singapore and most of Asia, asset inflation and rising CPI continue to be the key risks to growth. Monetary policy is still at exceptional (loose) levels in much of Asia still, said CIMB economist Song Seng Wun.

Data on Monday showed that India's HSBC Markit PMI fell to 56.7 from 58.4 in November, which was the highest reading since May 2010. A reading above 50 shows expansion.

South Korea's manufacturing sector clocked its fastest growth in seven months, with the HSBC/Markit PMI rising to 53.89 from 50.23 in November.

In China, the official PMI edged down to 53.9 in December from November's 55.2, data on New Year's day showed. That fell short of forecasts but also eased worries about overheating in an economy that saw inflation reach a 28-month high in November.

Japan's manufacturing activity, however, contracted for the fourth straight month in December, with the Markit/JMMA Japan PMI Index below the 50 threshold. However, the index rose to 48.3 from November's 47.3, showing the contraction had at least eased, data last week showed.

What we have been seeing until this month is the biggest countries in non-Japan Asia, China and India, seemingly picking up steam on the manufacturing front... while we generally have seen smaller more export-exposed economies such as Korea or Taiwan and Singapore all be relatively weak, said Robert Prior-Wandesforde, economist at Credit Suisse in Singapore.

Perhaps we are seeing early signs the policy tightening in China and India is having some effect on domestic activities, while the pick up in the U.S. and Germany and Europe is benefiting smaller exporting countries, he said.

PRICE PRESSURES

Economies across Asia are grappling with higher food and fuel prices, as well as asset price rises powered by an influx of funds from investors seeking higher returns than those offered in developed nations.

In India, factories are running near capacity.

The strong momentum is pushing the sector to the limit, with capacity constraints tightening. This is showing up in more outstanding business, lengthening delivery times, and, of more concern, an acceleration in both input and output prices, said Leif Eskesen, chief economist for India and ASEAN at HSBC.

The output price index for India continued to rise in December for the third straight month to reach its strongest since May, while input costs increased for the sixth successive month to the steepest since April.

The annual rise in India's headline wholesale price index eased in November to a one-year low of 7.48 percent but increasing food and fuel prices are expected to prompt the central bank to resume raising interest rates later this month.

Rising prices are a worry from South Korea to Indonesia and China, which raised interest rates for the second time in two months on Christmas Day.

The Bank of Korea needs to heed growing price pressures; with both input and output price indexes up sharply, it is only a matter of time before official inflation readings begin to threaten the central bank's target, said Song Yi Kim, an economist with HSBC based in Hong Kong.

(Additional reporting by Umesh Desai in Hong Kong and Nopporn Wong-Anan in Singapore; Editing by Neil Fullick)

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