A cluster of U.S. regional reports on Monday showed business picking up steam in August, suggesting the national economy is finally breaking free of its deep recession.

One report showed a nearly year-long plunge in economic activity in the relatively industrialized U.S. Midwest came to a halt last month as new orders and production rose sharply, potentially a harbinger for the country as a whole.

Still, a top Federal Reserve policy-maker warned that the economy remains fragile, and that central bank policies seen as critical to the recovery should not be changed abruptly.

New York Fed President William Dudley told CNBC television that it was too early to talk about curtailing the Fed's long-term security purchases.

I think it's a little premature ... The economy still isn't growing very fast and we do have a very high unemployment rate, Dudley said.

Many analysts have guessed that the U.S. economy will return to growth some time in the third quarter, and Monday's data suggested August may have been the clincher.

The Institute for Supply Management-Chicago's business barometer rose to 50.0 in August, the dividing line between growth and contraction, from 43.4 in July. Wall Street economists had expected a rise to only 48.0.

The Chicago PMI report is a further indication that the U.S. economy is starting to improve, said Shaun Osborne, chief currency strategist at TD Securities in Toronto.

Many strategists tied a jump in new orders to the government's cash for clunkers program, which got auto plants humming to meet demand for vehicles to replace gas-guzzlers.

We think the success of the clunker program is now lifting the index, said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York.

The auto sector plays a larger role in the Chicago region economy than it does nationally. The Chicago area index, which covers both the service and manufacturing sectors, is often viewed as a bellwether of national trends.

There was a strong increase in new orders, which is critical, said Pierre Ellis, senior economist at Decision Economics in New York.

A similar index covering the heavily industrialized Milwaukee region rose to 56 in August from 45 in July, while the Dallas Federal Reserve Bank said factory activity in Texas declined in August but at a slower pace than in July.

Meanwhile, business activity in New York City, which tends to be driven by trends in the financial sector, expanded in August for the first time in three months, thanks to increased purchases and a slowdown in layoffs.

The National Association of Purchasing Management-New York index of business conditions rose to 55.3 from 48.3 in July. Improvements in purchasing volume and employment conditions signaled the worst of the city's downturn might be ending, the group said.

The slew of regional data helped trim losses in the U.S. stock market, which was hit by weakness in financial shares and a soft tone overseas. The Dow Jones industrial average <.DJI> closed down 0.5 percent at 9,496, well above the day's worst levels.

JOBLESS RECOVERY?

The regional surveys showed employment remained soft despite the brighter outlook, consistent with fears the United States could be in for a jobless recovery. The ISM-Chicago's employment index contracted for a 21st consecutive month.

Increased hiring is seen as critical to getting a consumer-led recovery under way. The U.S. unemployment rate was 9.4 percent in July. Economists expect a report on Friday to show it rose to 9.5 percent in August.

Still, the Conference Board said online job vacancies advertised in August rose by 169,000, or 5 percent, offering a glimmer of hope for job seekers.

The August increase is good news, showing what we hope will be a continued improvement in job demand this fall, said Gad Levanon, senior economist at the industry group.

ECONOMISTS URGE ATTENTION TO BUDGET DEFICIT

A panel of business economists suggested factory output would help lead the economy out of recession.

After a large-scale package of tax cuts and spending to boost the economy, the government should now turn its focus to cutting spending, said respondents to a biannual survey conducted by the National Association of Business Economics.

The economists were split on whether the policies pursued by the Fed, which has cut benchmark U.S. interest rates to near zero and flooded financial markets with cash, would ultimately trigger higher inflation.

(Additional reporting by Richard Leong in New York and Lucia Mutikani and Mark Felsenthal in Washington; Editing by James Dalgleish)

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