A regional U.S. manufacturing gauge published Monday hit its highest level since October, but also suggested a rebound in that sector might run out of momentum.

At the same time, U.S. capital flows data underscored analysts' worry that the economic recovery could be stymied by a steep rise in bond yields, making borrowing more expensive for homeowners and companies.

The data showed China sold U.S. Treasuries in December for the fifth straight month, analysts said, underscoring the risk that waning appetite for U.S. debt among major foreign holders could spark a selloff and send yields rising in future.

A gauge of manufacturing in New York state rose in February as inventories jumped, the New York Federal Reserve said in a report on Tuesday.

The New York Fed's Empire State general business conditions index rose to 24.91 in February, the highest level since October and up from 15.92 in January.

On the surface, the main index appeared to reinforce the impression that industrial companies are continuing to bounce back after the long recession which ended last year. Economists polled by Reuters had expected a February figure of 18.

Despite a stronger-than-expected headline reading, however, some analysts said the details of the report were somewhat more bearish.

A lot of the improvement was driven by a correction of inventories, said Anna Piretti, senior U.S. economist at BNP Paribas in New York. It's a temporary factor. What worried me more was a sharp decline in new orders.

The inventories index rose sharply, to zero from negative 17.33, its highest reading in more than a year.

But the new orders index tumbled to 8.78 in February from 20.48 in the previous month -- a warning sign that activity could decelerate in future.

This clearly indicates that some of the demand that we hoped would sustain the recovery in manufacturing is not there, Piretti said.

However, the report offered some signs of improvement in the job market at factories.

Employment indexes were positive for a second consecutive month, although at relatively low levels, the Fed said.

The expectations index for six months ahead slipped to 52.78 in February from 56.

Over the longer term, borrowing costs may determine how anemic the U.S. economic recovery will prove to be.

Overall, net capital inflows into the United States rose to $60.9 billion in December, from an inflow of $30.9 billion the prior month, but foreigners cut purchases of long-term securities, the Treasury said on Tuesday.

The data also showed that China has now been a net seller of some $45 billion of U.S. Treasuries over the last five months, wrote Alan Ruskin, chief international strategist with RBS Securities Inc., which he added was a long enough period to hint strongly at a trend.

Much of China's selling has been in short-dated Treasury bills, but China has not indicated that instead it will buy longer maturity U.S. government notes and bonds. That is the bad news for the U.S. dollar and the Treasury market, Ruskin wrote.

(Additional reporting by Emily Flitter and Steven C. Johnson)

(Reporting by John Parry and Wanfeng Zhou; Editing by Theodore d'Afflisio)