A key gauge of U.S. manufacturing rose in March and new orders in February were stronger than initially thought, indicating a vibrant factory sector even as the economy slowed in the first quarter.

New orders for manufactured goods meant to last at least three years increased 2.5 percent after an upwardly revised 0.7 percent rise in February, the Commerce Department said on Wednesday.

The rise in March durable goods orders beat economists' expectations for a 2 percent advance, while orders in February had been previously reported to have dropped 0.6 percent,

Though the report -- which showed upward revisions to key categories in February -- did not change views that the economy slowed sharply in the first three months of this year, it confirmed that manufacturing continued to power the recovery.

It's fairly evident that the industrial sector of the U.S. economy is the growth driver and continues to be, said Neil Dutta, an economist at Bank of America Merrill Lynch in New York.

The recovery lost a step in the first three months of the year as harsh winter weather restrained activity and high gasoline and food prices weighed on consumer spending.

Government data on Thursday is expected to show growth slowed to an annualized rate of 2.0 percent or even less in the first quarter, according to a Reuters survey. The economy grew at a sturdy 3.1 percent rate in the fourth quarter.

The slowdown in first-quarter growth was acknowledged by Federal Reserve officials who at the end of a two-day meeting on Wednesday described the recovery as proceeding at a moderate pace -- a slight step back from a statement in March when it said the economy was on a firmer footing.

The Fed signaled it was in no rush to scale back the massive support it has given the economy.

Orders for long-lasting manufactured goods last month were buoyed by bookings for motor vehicles, transportation equipment and aircraft.

Excluding transportation, orders rose 1.3 percent after a revised 0.6 percent gain in February, which was previously reported as a 0.3 percent drop. Economists had expected this category to rise 1.8 percent.

The fairly strong manufacturing tone was captured by leading home appliance maker Whirlpool Corp, which reported a rise in first-quarter net profit rose to $169 million from $164 million a year earlier.

Manufacturing has been central to the economy's recovery from the worst recession since the 1930s, even though it constitutes less than 15 percent of economic activity.

A weaker dollar, which hit a three-year low against a basket of currencies on Wednesday, is helping the sector.

The durable goods report showed non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending, rose 3.7 percent last month after an upwardly revised 0.5 percent gain in February.

Concerns over capital spending triggered by weakness in the first month of the quarter prove unfounded, said Michelle Girard, an economist at RBS in Stamford, Connecticut. There is no indication that capital spending plans are being substantially curtailed.

Shipments of non-defense capital goods excluding aircraft rose 2.2 percent after advancing 0.4 percent in February. This component goes into the calculation of the government's measure of gross domestic product.

Orders for primary metals rose 3.9 percent in March, while machinery orders jumped 4.2 percent. However, orders for computers and electronic products fell, as did orders for communications equipment.

While it was too early for potential supply disruptions from the devastating earthquake and tsunami in Japan to show in the March report, analysts expect the impact on the U.S. economy to be minimal.

(Editing by Chizu Nomiyama)

Japan Manufacturing