Oil jumped more than 2 percent on Monday, touching a near seven-month high as improving global factory activity bolstered expectations of an economic recovery.

Data showed U.S. manufacturing shrank at a slower-than-expected rate in May, while industrial activity expanded in China. Surveys in Europe showed the manufacturing recession was easing.

Major stock markets rose more than 2 percent on the news, undeterred by General Motor's move to file for the biggest bankruptcy in U.S. manufacturing history.

U.S. crude traded up $1.53 to $67.84 by 1:31 p.m. EDT (1731 GMT), having earlier climbed as high as $68.29. London Brent crude gained $1.72 to $67.24 a barrel.

Further support came as the dollar fell to the lowest level this year, boosting investor demand for oil and commodities.

Stock markets are rallying on improved global factory activity. The dollar is at another five-month low. All that is being translated into the idea that the worst of the recession is behind us, said Tom Bentz, analyst at BNP Paribas Commodity Futures Inc in New York.

The economic slowdown battered global demand and sent crude off record highs over $147 a barrel struck last July to below $33, prompting oil producer group OPEC to agree to a series of deep output cuts last year.

Oil rallied by 30 percent in May on signs of a turnaround, pushing OPEC to maintain output targets when it met in Vienna last week.

Saudi Oil Minister Ali al-Naimi said during the weekend that OPEC would wait until crude inventories fall to around 53 days of forward cover before considering raising output, nearly 10 days below current levels.

The head of the International Energy Agency (IEA) said global oil demand may not have bottomed out yet but could still recover by the end of 2009 if the economy gets back on track.

Our calculations are telling us that if economic growth comes back as the World Bank or International Monetary Fund have been saying, and if OPEC continues the current production level, the demand level may come back to the regular five-year average toward the end of the year, IEA's Nobuo Tanaka said.

A Reuters survey of analysts forecast weekly U.S. inventory data will show a 1.5-million-barrel decline in crude stocks for the week to May 29, while gasoline and distillate inventories were seen rising.

(Additional reporting by Robert Gibbons, and Gene Ramos in New York, Alex Lawler in London and Jonathan Leff in Singapore; Editing by Christian Wiessner)

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