The economy showed signs it was decelerating, with an index of service activity pointing to slower growth in November while new orders for factory goods declined in October for the second straight month.

The Institute for Supply Management said on Monday its services index fell to 52.0 last month from 52.9 the month before. The reading was below economists' forecasts for 53.5, according to a Reuters survey.

The ISM reading stands in contrast to a more upbeat trend in recent data that has showed the United States bucking the global downturn. A reading above 50 indicates expansion in the sector.

This is the first disappointing indicator we've seen in the last couple of weeks, said Cary Leahey, managing director at Decision Economics in New York.

The economy has improved, it is still not growing very quickly.

Still, some readings in the index were more positive and suggested the country could avoid a recession in at least the near term.

A gauge of new orders rose to 53.0 from 52.4, but the employment component fell to its lowest level since September at 48.9 from 53.3.

Those who had been forecasting another recession will probably have to start rethinking things, said Michael Yoshikami, chief investment strategist at YCMNET Advisors in Walnut Creek, California.

We shouldn't get too excited because we still have subpar GDP growth and stubbornly high unemployment, he said.

U.S. stocks held onto gains following the ISM report as optimism grew that an upcoming Europeans Union summit would break new ground to resolve the euro zone debt crisis.

A possible worsening of the euro area crisis could still derail the U.S. recovery.

Government debt prices trimmed losses slightly, while the dollar held onto losses versus the euro.

FACTORY ORDERS FALL

In a separate report, new orders for U.S. factory goods fell in October for the second straight month, suggesting a possible softening in the manufacturing sector. That area of the economy has supported the country's recovery from the 2007-2009 recession.

The Commerce Department said on Monday orders for manufactured goods decreased 0.4 percent after a 0.1 percent drop in September.

Economists had forecast orders would fall 0.3 percent after a previously reported 0.3 percent increase in September.

The report showed orders excluding transportation rose 0.2 percent.

Orders for transportation equipment dipped 5.1 percent in October as demand for civilian aircraft dropped 16.8 percent. Orders for motor vehicle and parts rose 2.3 percent.

The department said orders for durable goods, manufactured products expected to last three years or more, fell 0.5 percent, a smaller decline than initially estimated. Durable goods orders excluding transportation were up a revised 1.1 percent, stronger than the initial report in November. Orders for non-defense capital goods excluding aircraft fell 0.8 percent, a more modest decline than originally reported.

(Writing and additional reporting by Jason Lange in; Washington; Further reporting by Ellen Freilich in New York; Editing by Neil Stempleman)

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