U.S. manufacturing output rose in January and a gauge of factory activity in New York state hit a 1-1/2-year high in February, showing a solid underpinning for the economic recovery.

The firmer tone was also in evidence in another report on Wednesday that showed optimism among home builders approached a five-year high this month, a good omen for the struggling housing market.

The reports added to a run of fairly upbeat data, even though overall industrial production was flat last month as unusually mild winter weather weighed on utility output.

What we are seeing here is confirmation of the positive momentum we have seen in the economy over the past few months, said Millan Mulraine, senior macro strategist at TD Securities in New York.

Factory production increased 0.7 percent, the Federal Reserve said, after an upwardly revised 1.5 percent rise in December. The December increase was previously reported as a 0.9 percent gain.

Manufacturing was buoyed by a 6.8 percent jump in motor vehicle output. But production at utilities plunged 2.5 percent, the second straight month of big declines.

A 1.8 percent drop in mining production, the first decline in almost a year, also helped damp industrial output last month. However, overall production was stronger than first thought in December, rising 1 percent as opposed to the previously reported 0.4 percent gain.

The mining sector has been enjoying a renaissance over the past couple of years and, barring a collapse in oil prices, we expect that will continue for some time, said Paul Ashworth, chief U.S. economist at Capital Economics in Toronto.

So everything looks rosy for manufacturers now, but we're still concerned that Greece's exit from the euro zone sometime this year will stop the global turnaround in its tracks.

Concerns about Greece dominated sentiment on U.S. financial markets, where the broader Standard & Poor's 500 index <.SPX> touched a fresh seven-month high before giving up gains and turning negative in late afternoon trading.

U.S. Treasury debt prices were little changed while the dollar was flat against a basket of currencies <.DXY>.

OFF TO A FIRMER START

Data, including employment, manufacturing and retail sales, so far suggest the economy got off to a firmer start in 2012, prompting analysts to scale back expectations of a sharp pull-back in first-quarter growth and further monetary easing by the Fed.

Minutes of the central bank's January 24-25 policy meeting released on Wednesday showed a few Fed officials believed a third program of bond buying or 'quantitative easing' would be warranted this year to support the economy.

The economy grew at a 2.8 percent annual pace in the last three months of 2011, with a build-up of inventories accounting for two-thirds of the rise.

Economists believe businesses have enough stock on hand to meet demand. That, together with a mild recession in the euro zone as a result of the debt crisis, could take some edge off the U.S. economy.

But there are no signs manufacturing is wilting. A report from the New York Federal Reserve showed a gauge of factory activity in New York state rose to its highest level in more than 1-1/2 years in February.

However, slowing new orders and further declines in unfilled orders suggested activity in that region could be close to peaking. There was a rise in shipments and companies increased hours for existing workers.

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Graphic on Feb U.S. NAHB homebuilder sentiment: http://link.reuters.com/raj66s

Graphic on Jan U.S. industrial output, capacity utilization: http://link.reuters.com/ryh66s

Graphic on New York Fed's Empire State manufacturing data: http://link.reuters.com/puh66s

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Manufacturing remains the main pillar of the economy, although it only accounts for about 12 percent of gross domestic product and 11 percent of nonfarm payrolls.

Capacity use in manufacturing rose in January to 77.0 percent, the highest since April 2008.

The manufacturing sector is in a growth spurt, but it is not a spurt likely to turn sour as it is well diffused in the manufacturing sector and not producing bloated inventories - it is the 'real McCoy', said Michael Montgomery, a U.S. economist at IHS Global Insight in Lexington, Massachusetts.

There are also signs of green shoots in the housing market, which has been a drag on the economy, with confidence among home builders the highest this month since May 2007.

Sentiment has increased for five straight months. Builders have been breaking ground on new residential projects, driven by rising demand for rental apartments as Americans shift away from homeownership.

Home building is expected to add to growth this year for the first time since 2005.

The true test of the strength of housing construction will be the health of the spring selling season, said Michelle Meyer, an economist at Bank of America Merrill Lynch in New York. This has been an unusually warm winter, which could be biasing the data.

(Reporting By Lucia Mutikani; Editing by James Dalgleish)

Manufacturing