New orders received by U.S. factories rose a stronger-than-expected 0.9 percent in September, while inventories continued to shrink, the Commerce Department said on Tuesday in a report suggesting manufacturing activity is feeding the economic recovery.

It was the fifth month out of six that orders rose, the department said. They dropped an unrevised 0.8 percent in August. Analysts polled by Reuters had expected orders to increase 0.8 percent.

U.S. stocks indexes pared losses on the news, while U.S. Treasury debt prices were little changed.

It's a solid rise in orders. They are consistent with manufacturing growing again, said James O'Sullivan, chief economist for MF Global in New York. Inventories are still falling so there is more room for orders and production to grow.

Inventories have now fallen for 13 months in a row, with factories paring their stocks by 1 percent in September. This is the longest streak of shrinking inventories since they fell 15 months in a row beginning in February 2001.

While factories cut inventories more sharply in September than in August or July, the Commerce Department said last week inventory liquidation by all businesses slowed in the July through September period, adding nearly a percentage point to the increase in third-quarter Gross Domestic Product.

In September, machinery, which makes up roughly 7 percent of factory orders, had the largest surge of 7.9 percent in its biggest increase since March 2008.

The data comes on the heels of the Institute for Supply Management's report that its index of national factory activity hit its highest level in more than three years last month, and that its gauge has now come in above 50 -- the dividing line between expansion and contraction -- for three months in a row.

(Reporting by Lisa Lambert; Additional reporting by Richard Leong in New York, Editing by Andrea Ricci)

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