Private-sector growth in the euro zone ground to a halt this month and China's factory sector contracted for the first time in a year, surveys showed on Thursday, deepening evidence of a global slowdown.

Hopes that the U.S. economy will snap out of its recent slowdown were supported by a rebound in manufacturing in the country's mid-Atlantic region, although an unexpected rise in jobless claims underscored how weak the labor market remains.

The surveys were published just before European leaders met to hash out a second bailout of Greece and to try to allay fears a possible debt default by Athens could spread havoc.

Markit's Eurozone Purchasing Managers' Indexes showed growth in the 17-nation bloc's factory sector came to a standstill in July while its dominant service sector grew at its slowest rate in 22 months.

The large fall in the flash euro zone PMI in July provides further signs that the debt crisis may be starting to take a heavy toll on the economic recovery in the region, said Ben May at Capital Economics.

The debt crisis has pushed Greece, Ireland and Portugal into bailouts and raised fears in recent weeks that it will engulf Italy and Spain as well.

Euro zone leaders were set to give their financial rescue fund sweeping new powers to prevent contagion and help Greece overcome its debt crisis, according to the draft conclusions of an emergency summit on Thursday.

The flash services PMI sank to 51.4 this month from 53.7 in June, its lowest since September 2009 and far below expectations for 53.0. It has, however, been above the 50 mark that divides growth from contraction for nearly two years.

The flash manufacturing PMI fell more than expected to 50.4 from 52.0 in June, its lowest reading since September 2009.

There is no doubt that the freefall in the PMIs of the last three months comes as a negative surprise. We believe that external factors remain predominant, in particular the ongoing softening in the global factory cycle as shown by further signs of weakness in China ..., said Marco Valli at UniCredit.

China's factory sector contracted in July for the first time in a year and at its fastest pace since March 2009 as monetary policy tightening and slack global demand weighed on the economy, according to HSBC'S Chinese PMI. [ID:nL3E7IL0KM]

In a positive sign for the battered U.S. manufacturing sector, factory activity in the mid-Atlantic region posted its first rise since March in July after contracting in June.

But the number of Americans filing new claims for unemployment benefits rose more than expected last week.

On the whole, this data suggests that activity for the moment in July seems pretty subdued, said Paul Dales, senior U.S. economist for Capital Economics in Toronto, Canada. It's too soon to abandon the idea that we will get a little bounce back in growth in the third quarter.

Some economists say the U.S. debt crisis has hurt confidence among Americans. Lawmakers are in a standoff over raising the U.S. debt ceiling, raising the risk of a default.

U.S. firms are hurting as well. Appliance maker Whirlpool said it expects U.S. shipments to shrink this year by 1 to 2 percent, reversing a previous forecast for small growth. Demand also slowed in formerly strong markets like India.

We expect to continue to see demand volatility as consumers around the world remain impacted by economic uncertainties and high inflation, CEO Jeff Fettig said.

PRODUCTION PLUMMETS

Output in the euro zone's manufacturing sector, which drove a large part of the recovery in the bloc, shrank for the first time in two years, with the index falling to 49.5 from 52.5, its lowest since July 2009.

Factories also saw new orders falling for the second month running, with the index sliding to 47.6 from 49.8, its lowest reading since June 2009.

We have orders in contractionary territory which tells you that the European economy is losing momentum at a time when the resolution to the crisis is going to be heavily dependent on a strong Germany, said Peter Dixon at Commerzbank.

An earlier release from Germany, Europe's largest economy, showed its composite PMI staging the biggest one-month fall since late 2008, slumping to 52.2 from June's 56.3.

The picture was little better in France where the composite index fell to a 23-month low of 52.8 from June's 54.9.

The glum indexes meant the euro zone composite PMI, a broader measure of the private sector which combines the services and manufacturing data, collapsed to 50.8 from 53.3, just in positive territory and well below forecasts for 52.6.

The composite index is often used as a guide to growth and Markit said if the PMIs remained at current levels there would be no economic growth in the third quarter, and without the tepid growth seen in Germany and France the euro zone index would have been negative.

Economists polled by Reuters this month predicted euro zone growth of 0.4 percent this quarter.

The European Central Bank raised interest rates this month and signaled another increase is likely later this year.

In one bright spot in Thursday's euro zone surveys, businesses continued to take on new workers, and at a slightly faster rate than in June.

($1 = 0.704 Euros)

(Additional reporting by Kevin Yao in Beijing; Editing by Tony Chopra, Ruth Pitchford and James Dalgleish)

Portugal Germany India Canada