Manufacturing in New York state grew in June even as employment declined, supporting the view the factory sector is recovering, while import prices recorded their largest decline in nearly a year in May.

The Empire State general business conditions index edged up to 19.57 June from May but was below April's reading, the report from the New York Federal Reserve said on Tuesday. Economists polled by Reuters had expected a June reading of 20.00.

The employment gauge dropped, although it remained positive. The index for the number of employees fell in June from May, while the average employee workweek index rose.

The manufacturing recovery remains fairly strong. It supports the view that the fiscal crisis in Europe has not impacted on the U.S. economy for now, said Paul Dales, U.S. economist at Capital Economics in Toronto.

Moody's Investors Service downgraded Greece's debt rating to junk status on Monday, underscoring fears about the effect of Europe's debt woes on the global recovery. A poll on Tuesday showed German analyst and investor sentiment fell in June by the most since the height of the financial crisis in 2008.

Some recent U.S. economic data has suggested the rebound may be losing momentum, including a weaker-than-expected May jobs report and a surprise decline in May retail sales.

In a separate report on Tuesday, U.S. import prices declined in May as petroleum costs plummeted, bolstering projections of tame inflation and low interest rates.

Import prices fell 0.6 percent, the biggest decline since July, after rising by a revised 1.1 percent in April, the Labor Department said.

Strength in the U.S. dollar is also helping to keep inflation pressures muted, and this should allow the Fed to renew its low interest rate pledge at next week's monetary policy-setting meeting.

U.S. stocks <.SPX> opened higher, boosted by gains in the euro against the dollar and the import price data. U.S. Treasury debt prices were mostly flat.

Best Buy Co , however, fell nearly 7 percent, as its earnings and revenue missed Wall Street's consensus forecasts, and the electronics retailer cited a decline in prices for televisions.

Another report showed U.S. homebuilder sentiment fell in June by the sharpest amount since the height of the financial crisis as the homebuyer tax credit expired.

This shouldn't come as any huge surprise with the end of the home-buyer tax credit. We are going to see a few months of weakness, said Gus Faucher, director of macroeconomics at Moody's Analytics in West Chester, Pennsylvania.

The National Association of Home Builders said the NAHB/Wells Fargo Housing Market index dropped 5 points to 17, the sharpest point decline since November 2008.

FIRST DROP IN PRICES SINCE FEB

For import prices, although the decline was less than economists' expectations for a 1.2 percent fall, it was the first drop since February.

April import prices were previously reported to have increased 0.9 percent. In the 12 months to May, import prices rose 8.6 percent.

The monthly decline in import prices reflected a 5.0 percent fall in the cost of imported petroleum and petroleum products, the largest drop since December 2008, after a 3.7 percent gain in April.

Excluding petroleum, import prices rose 0.5 percent after rising by the same margin in April.

Export prices were lifted by agricultural products, foods and industrial supplies and materials. The year-on-year gain in export prices is the largest since September 2008.

Despite persistent concerns about the recovery, many economists and strategists have said they don't expect the U.S. economy will fall back into recession soon.

In my view in the U.S., we're going to avoid a double-dip recession, but second-half growth is going to be below 2 percent, economist Nouriel Roubini said on CNBC on Tuesday.

(Additional reporting by Lucia Mutikani and Corbett Daly in Washington and Wanfeng Zhou and Richard Leong in New York; Editing by Padraic Cassidy)

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