Factory activity in the U.S. Mid-Atlantic region slumped to a nearly 2-1/2 year low in August and home resales unexpectedly dropped last month, dampening hopes for a quick revival in economic growth.

Other data on Thursday also pointed to a bit of inflation in the economy, which could make the Federal Reserve hesitant to ease monetary policy further to stimulate the economy.

Global stocks tumbled on the extremely weak regional manufacturing data that investors viewed as a sign the recovery was on the rocks. But economists cautioned against reading too much into the survey, which was conducted during a period of exceptional turmoil in financial markets.

The Philadelphia Federal Reserve Bank's business activity index plummeted to minus 30.7 in August, the lowest level since March 2009 when the economy was in recession, from 3.2 in July. A reading below zero indicates a contraction in the region's manufacturing.

We should take it with a pinch of salt, said Harm Bandholz, chief U.S. economist at Unicredit Research in New York. I don't think the economy came to a complete standstill in August or September. That's what the numbers are suggesting.

Other economists agreed. Even the Philadelphia Fed appeared to play down the plunge in the index, noting the collection period for this month's survey ran from August 8-16, overlapping a week of unusually high volatility in both domestic and international financial markets.

In addition, the survey's forward-looking measures pointed to some growth in new orders, shipments and employment over the next six months. Economists had expected the business activity index to show a reading of plus 3.7 in August.

HARD DATA SHOWS FIRMER TONE

The weak manufacturing report and fears about European banks hammered Wall Street stocks. The Standard & Poor's 500 Index dropped 4 percent. Prices for U.S. government debt rallied on safe-haven flows, while the dollar firmed broadly.

Investor sentiment also soured as Morgan Stanley cut its global growth forecast and said the United States and its major export partners in the euro zone were dangerously close to recession.

The plunge in factory activity this month is in stark contrast with data on retail sales and industrial production, and economists said the Philadelphia Fed survey tends to lag national manufacturing.

Hard data so far available for the third quarter have taken a clearly stronger tone and timely jobless claims data are not indicative of a dramatic weakening in the economy, said Peter Newland, a U.S. senior economist at Barclays Capital in New York.

Initial claims for state unemployment benefits increased 9,000 to 408,000 last week, but the four-week moving average dropped to a four-month low -- pointing to an improvement in the underlying labor market trend.

New York Fed President William Dudley also did not believe the economy was sliding back into recession.

The risks have risen a little bit, but I think we very much still expect the economy to recover. We expect ... growth to be significantly firmer than it was during the first half of the year, he told New Jersey business leaders.

But obstacles to the recovery are many. Sales of previously owned homes fell 3.5 percent to an annual rate of 4.67 million units in July, the lowest in eight months. Economists had expected home resales to rise to a 4.90 million-unit pace.

The housing market has been swamped by an oversupply of unsold properties and Americans spooked by plummeting home values are moving into rentals, keeping underlying inflation pressures elevated.

Consumer prices rebounded 0.5 percent in July after falling 0.2 percent in June. A seasonal adjustment to gasoline prices accounted for about half of the rise in the Consumer Price Index last month.

Prices excluding food and energy rose 0.2 percent after increasing 0.3 percent in June. Some components of the so-called core CPI showed a pickup, which economists said could be troublesome for the U.S. central bank.

The Fed last week promised to keep interest rates near zero at least until mid-2013 to aid growth and said the outlook for inflation over the medium term was subdued.

The annoyingly high readings on core inflation could present some headaches for the Fed that is biased to provide more support to growth, said Michael Feroli, an economist at JPMorgan in New York.

If growth simply remains mired in the doldrums then the failure of core inflation to move lower could slow the degree to which the Fed provides further monetary stimulus.

Owners equivalent rent, which is used by the government to measure the amount homeowners would pay to rent or would earn from renting their property, rose 0.3 percent in July after a 0.2 percent gain the prior month.

The measure accounts for more than 30 percent of the core CPI and last month's rise helped to lift the year-on-year core CPI rate 1.8 percent-- the largest gain since December 2009 -- after rising 1.7 percent.

(Additional reporting by Leah Schnurr in New York; Editing by Kenneth Barry)

Manufacturing