Manufacturing surveys from other big emerging economies India and Russia served to bolster investor sentiment, with Asia's third-largest economy marking its 16th month of expansion and Russia's activity improving for the seventh month in a row.

In the 16-nation euro zone, factory activity accelerated led by Germany and Italy - but it slowed to its weakest in 10 months in France, illustrating how uneven the rebound is even within Europe.

HSBC's purchasing managers index (PMI) of Chinese companies showed government steps to slow bank lending and fight property speculation hit home, as manufacturing activity shrank for the first time since the depths of the global downturn in March 2009.

"This is the slowdown that the government `wanted' - this is no new global crisis," said Roland Randall, strategist at TD Securities. "Targeted government restrictions and receding fiscal stimulus are to blame."

A similar government survey published on Sunday showed a marked dip in growth but no contraction.

European manufacturing was supported by a hefty jump in activity in No.1 economy Germany and British factories that saw expansion easing only slightly in July, although both countries saw slowing export order growth.

"It is apparent that the improvement signaled by the euro area PMI for July was almost entirely driven by a growth spurt in Germany," said Chris Williamson, chief economist at Markit.

On Monday, German retailer Metro - the world's 4th largest - said it was more confident about the economic recovery as it reported overall profits in line with forecasts.

But more worryingly, the PMI showed manufacturing growth in France slowed to a 10-month low, with little sign of a 27-month stretch of job losses abating.

US gross domestic product data on Friday showed growth slipped to 2.4 percent on an annualized basis in the second quarter from 3.7 percent in the first, heightening market concerns about growth there and leaving investors betting on China and the rest of Asia to pick up the slack.

The US manufacturing sector grew in July for the 12th straight month, providing a boost to the slowing economic recovery.

The Institute for Supply Management said Monday that its manufacturing index slipped to 55.5 in July from 56.2 in June. That marked the third straight month of declines.

Still, a reading above 50 indicates growth and the index has been above that level for the past year.

In a separate report, the Commerce Department said construction spending edged up 0.1 percent in June. But all the strength came from government building. Private sector activity in both housing and nonresidential projects fell.

Manufacturing has helped drive the recovery as many businesses began rebuilding their stocks after slashing them during the worst recession in decades. The pace of growth has slowed since peaking in April at 60.4. But it is well above the 32.5 reading in December 2008 - the low point during the recession.