Factories in Asia stepped up production in December, with China's output growing at its fastest pace on record, suggesting economic activity is gathering pace in the region that is leading the global recovery.

Manufacturing activity hit a seven-month peak in India last month and it also rose in South Korea, where factories added the most jobs in nearly two years, purchasing managers' indexes showed on Monday.

In China, the HSBC PMI rose to 56.1 from 55.7 a month earlier to reach its highest level since the survey began in April 2004. A reading above 50 indicates manufacturing activity is expanding, while a level below 50 suggests contraction.

China's manufacturing PMI will likely remain above 50 and even accelerate in coming months, as exports are improving, private investment is coming back and public investment remains robust, Ting Lu, an economist at Bank of America-Merrill Lynch said in a research note.

Stimulus-fueled economies in Asia, notably China, have been recovering rapidly since around the middle of last year, leading the worldwide rebound from the global crisis.

Growth in Japan's manufacturing activity picked up for the first time in three months in December and upbeat export orders from China are likely to continue lifting production, a Nomura/JMMA survey showed last week.

December's PMI for the euro zone is due at 0858 GMT and U.S. figures are due at 1500 GMT. Both sets of data are expected to show a pick up in activity.

By contrast, Russia's PMI fell to 48.8, the lowest in five months, from 49.1 in November. In the last 17 months, the index has only once risen above 50, which was in September 2009.

BACKS RATE OUTLOOK

Output in India and South Korea gained momentum, underlining expectations that they will be the first Group of 20 nations after Australia to raise interest rates following the crisis.

The Bank of Korea reviews monetary policy on Friday, while the next scheduled meeting of the Reserve Bank of India is on January 29.

India's PMI rose for the first time in three months in December to 55.6, the highest level since May, from 53.0 in November.

South Korea's index increased to 52.84, the highest point since August, from 52.61 in November.

The Bank of Korea can afford to stay on hold this week, but we stick by our call that interest rates will go up before the end of this quarter, mainly to ease worries over household lending growth and asset bubbles, said Frederic Neumann, senior Asia economist at HSBC.

China's heavy public spending on infrastructure launched in late 2008 has catalyzed private investment in factories and property, lifting year-on-year economic growth to 8.9 percent in the third quarter.

The fiscal stimulus is also adding upward pressure on prices.

Chinese manufacturers raised their prices at the fastest rate in 17 months in December, the PMI showed. Companies said the inflationary pressure came from a combination of buoyant market demand and rising raw material prices, particularly for steel.

But many analysts believe that industrial overcapacity will restrain inflation pressures and that the government will rein in money growth to keep a lid on inflation.

We believe inflation will be manageable in the coming months, Qu Hongbin, chief China economist at HSBC, said.

The Chinese leadership has pledged greater policy flexibility this year, which the market has interpreted as a pledge to gradually shift to a tightening bias after taking only small steps until now to wind down ultra-loose monetary policy.

(Additional reporting by Anurag Joshi in MUMBAI and Yoo Choonsik in SEOUL; writing by Kazunori Takada)

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