* Key U.S. factory barometer back in expansion mode

* Cash for clunkers shot in the arm for US auto sales

* Chinese, European factory data suggest some stability

* Exit strategies in focus ahead of G-20 finmin's meeting

Manufacturers from several countries including the United States produced some upbeat news on Tuesday, indicating that a recovery from the deepest global downturn since World War Two is slowly gaining traction.

The national reports were validated by a survey showing global factory activity on the rise for the first time since May 2008, led by the United States and Japan.

Some fretted, though, that the recovery leans too heavily on expensive government efforts -- from the popular U.S. cash for clunkers auto sales incentives to a pre-election propping up of Germany's labor markets.

And the reports were not enough to support global equities, which fell heavily on worries that investors have gotten ahead of themselves in pricing in a recovery.

Ways to gracefully wind down government supports without reversing the nascent recovery were on the mind of officials preparing for a G-20 finance minister's meeting in London set for this weekend.

The U.S. factory sector expanded in August for the first time since January 2008, according to a key purchasing managers survey. [N01376541]

The return to growth was more robust than expected, spearheaded by the more than 690,000 older vehicles scrapped in the United States in return for $3 billion in taxpayer-funded credits to buy more fuel-efficient vehicles. [nN01493744]

The Institute for Supply Management (ISM)'s closely watched barometer of U.S. factory activity jumped to 52.9 from 48.9 in July, the highest level since June 2007. [nTAR001063]

A reading above 50 shows growth in the nation's factory sector. New orders and production levels soared.

The biggest winners from the popular clunkers program were major Asian brands and Ford Motor Co (F.N), which benefited from a stronger lineup of small cars and crossover vehicles. Ford reported a 17 percent sales gain last month from August 2008.

General Motors Co. GM.UL said August sales fell 20 percent from a year earlier but sales of its core brands (GMC, Chevrolet, Buick and Cadillac) rose 21 percent from July.

On the annualized basis tracked by investors, industry-wide U.S. sales appeared to have topped 14 million units in August, the highest sales rate of the year so far.

Still, strategists fear August's rush mostly cannibalized future sales, leaving automakers with both depleted inventories and uncertain demand in the months ahead.

FLICKER OF HOPE ON U.S. JOBS

Also on Tuesday, pending U.S. home sales, or sales of previously owned houses, hit a two-year high in July, suggesting drastic price cuts and a more stable economy have started to tempt buyers back into the market.

Some recovery from the three-year old U.S. housing slump is seen as essential to any economic turnaround.

Both (ISM and housing) reports are encouraging readings. I'm particularly encouraged by new orders and the spread between new orders and shipments in the ISM report, said Jonathan Basile, an economist at Credit Suisse in New York.

The ISM's employment component also offered a flicker of hope for the anemic U.S. jobs market, rising to its highest level since August 2008.

Still, Norbert Ore, chair of the manufacturing business survey committee at ISM, warned the factory sector's recovery might not create many new jobs for now.

Getting the U.S. unemployment rate down substantially from its current 9.4 percent is seen as key to a sustained economic recovery -- especially once huge government stimulus spending finally runs its course.

Major U.S. share indices .SPX .DJI .IXIC are up roughly 50 percent since March, arguably beyond the levels dictated by what could be a subdued economic recovery.

We are heading into what we call the New Normal, which is a period of time in which economies grow very slowly as opposed to growing like weeds, said Bill Gross, manager at influential bond fund PIMCO, wrote in a newsletter posted on Tuesday.

Wall Street shares tumbled about 2 percent on Tuesday, with world stocks .MIWD00000PUS down 1.8 percent.

A flight to safety boosted U.S. Treasury debt prices. Yields, which move inversely to prices, tumbled. The benchmark 10-year Treasury note yield fell to its lowest level since mid-July. Commodity prices .CRB also fell sharply.

STEADY CHINESE IMPROVEMENT

China's sprawling manufacturing sector kept up its steady recovery in August, hitting a 16-month high according to the China Federation of Logistics and Purchasing. New orders, output, imports and employment all rose.

But despite the positive signs from China, which some observers hope will power a recovery by maintaining its appetite for imports, global performance remains patchy in what seem to be the early stages of recovery.

In India, for example, manufacturers endured their slowest growth in five months.

Overall Euro zone factory activity fell less than expected in August. The Markit Eurozone Manufacturing Purchasing Managers Index rose to 48.2 from 46.3 in July, creeping toward the 50 mark that divides growth from contraction.

Still, activity shrank unexpectedly in Britain, and the rates of contraction accelerated in Spain and Italy. [ID:nL1586760]

In eastern Europe, manufacturing in Poland and the Czech Republic reached the recovery threshold but industrial sentiment in Hungary slumped. [ID:nL1262341]

Economists say euro zone growth could be hampered by high unemployment, which puts a damper on retail demand, and any winding up of the trillions of dollars various governments have injected into the their respective economies. [ID:nL1612249]

With a recovery apparently under way, German Chancellor Angela Merkel said in a radio interview that lending conditions will have to tighten once the crisis is over. [ID:nBAT003123]

The money supply will have to be reduced, she said.

And in an interview with the Financial Times before the G-20 meeting, British Prime Minister Gordon Brown called for greater international coordination in ending the stimulus. [ID:nL1606967] (Editing by Todd Eastham)

Germany Japan