* Carmakers lead the surge in factory sales

* Data points to third-quarter economic recovery

* Manufacturing strength not seen as sustainable

Canadian factory sales rose in July at their fastest pace in 11 years, supporting expectations that the economy is growing again even though manufacturers are not expected to be the main driver of the recovery.

Factory sales surged 5.5 percent in July from June to C$41.4 billion ($38.7 billion) after some automakers switched assembly lines back on after extended shutdowns and demand for primary metals rose sharply, Statistics Canada said on Wednesday.

Although there were some less-than-bullish elements in the report, the overall figure topped market expectations for a 2.5 percent gain and marked the biggest monthly expansion since August 1998, when sales rose 5.8 percent.

Factory sales rose 2.2 percent in June, according to Statscan's revised figures. Sales in volume terms were up 5.5 percent in July and sales excluding motor vehicles and parts rose 2.1 percent.

The report follows other data showing the Canadian economy is pulling out of recession in the third quarter, as projected by the Bank of Canada.

While the majority of July's gain emanated from the auto industry, which we expect to languish in August, other components eked out growth as well, said Dawn Desjardins, assistant chief economist at Royal Bank of Canada.

Sales in the troubled auto industry leaped by 48.2 percent in July, helped by stronger U.S. demand for cars as a result of the cash for clunkers program. Auto sales at the factory gate remained 23 percent below their value of a year earlier, however.

Primary metals, used to make cars among other things, also pushed overall sales figure higher with an 11.2 percent gain.

The Bank of Canada held its overnight interest rate steady at 0.25 percent last week to stimulate the economy and repeated its pledge to hold it there until the end of June next year.

The tentative nature of the global recovery is keeping downside risks alive and supports the case for the bank to maintain a 0.25 percent policy rate, Desjardins said.

CURB YOUR ENTHUSIASM

Other details of the factory report were less solid and analysts cautioned that the growth in manufacturing sales was unlikely to persist.

New orders fell 3.7 percent after surging 18.6 percent in June, unfilled orders fell 4.3 percent and inventories fell 2 percent, suggesting factories were not yet ramping up production to keep up with new demand.

We think it premature to pull out the party streamers ... we think it highly unlikely that the strong gains of the past few months can be indefinitely sustained going forward, said Eric Lascelles, chief economics and rates strategist at TD Securities.

No one should look to the manufacturing sector as the standard bearer for the Canadian economy due to the ongoing struggles associated with still-weak U.S. demand, a strong Canadian dollar, and an ongoing structural shift in production away from developed countries, he said. ($1=$1.07 Canadian) (Reporting by Louise Egan; editing by Peter Galloway)

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