Factory orders shrank at a slower pace in January than forecast, the CBI's industrial trends survey showed on Wednesday.

The Confederation of British Industry survey's total order book balance rose to -16 this month from -23 in December, above expectations of a reading of -20.

The crisis in the euro zone is still hanging over the UK, threatening future growth, said John Cridland, CBI Director General.

Nevertheless, within this survey there are some tentative signs that things could improve somewhat in the coming quarter. Key factors behind this include the fact that U.S. recovery has been better than expected, and the impact of the credit rating downgrade in the euro area has been muted.

Data showed earlier on Wednesday that the economy shrank by 0.2 percent in the final quarter of 2011, as manufacturing output contracted sharply.

It is clear from the survey that conditions in UK manufacturing remain fragile. However, the steepness of the slowdown in growth this quarter was partly caused by the specific issue of de-stocking, said CBI chief economic advisor Ian McCafferty.

While the acute fears seen at the end of last year over global demand may be subsiding, 2012 will prove to be a difficult year for UK manufacturing, as the crisis in the euro zone - our biggest exports market - has yet to reach any definitive resolution.

(Reporting by Fiona Shaikh, writing by David Milliken)