Factory activity worldwide stalled last month as new orders tumbled, heightening fears that the global economy may be heading for another recession and driving stock markets lower.

Surveys of company purchasing managers showed manufacturing contracted in the euro zone for the first time in almost two years in August, echoing earlier data from South Korea and Taiwan where new export orders fell sharply.

Britain's manufacturing sector shrank at its fastest pace in over two years, hurt by a sharp drop in demand for exports, and figures due at 1400 GMT are expected to show factory activity declined in the United States for the first time since the recession.

And although China's official PMI increased slightly, its first rise since March, it also showed the effects of slowing demand in Europe and the United States.

HSBC's PMI figure for China, which relies more heavily on private companies than the large state-owned enterprises that dominate the government's PMI report, showed growth in factory activity, while still rapid, was slowing.

The key thing they show is that we are not out of the woods. The economies are very vulnerable to any shock which at this moment in time there are a few of, said Jeavon Lolay at Lloyds Banking Group.

What is happening in the euro zone is very important and in the US growth has weakened markedly in the last two quarters. There is a risk of a return to recession.

The data saw financial markets kick off September in a grim mood, prompting a sell-off of European assets and leaving Wall Street set to open with losses.

FACTORIES FLAG

Markit's Eurozone Manufacturing PMI fell to 49.0 in August from 50.4 in July, revised down from a preliminary 49.7, the first time since September 2009 that the index for the sector, which drove a large part of the bloc's recovery, has fallen below the 50 mark that divides growth from contraction.

In a worrying sign for policymakers, the slowdown appears to be spreading. German factories, which have been supporting growth in the bloc, eased off the accelerator and French manufacturing contracted for the first time since July 2009.

The German economy grew just 0.1 percent in the second quarter, far slower than the 1.3 percent growth seen in the first three months of the year, figures released on Thursday showed, adding to evidence the outlook for Europe's largest economy darkens.

Euro zone leaders have been battling to prevent a debt crisis spreading from periphery members to some of the bloc's bigger economies while the U.S. has been fighting its own demons of sluggish growth and impending tough austerity measures.

The West's deteriorating growth outlook is becoming an increasingly heavy burden to bear, said Donna Kwok, an economist with HSBC, which sponsors PMI reports in many Asian countries.

Weak growth in the U.S. and Europe has revived worries they will slip back into recession, which would deal a heavy blow to Asia's export-driven economies.

Most advanced economies have already cut interest rates to near zero, and with government finances constrained, policymakers have limited options for spurring stronger growth.

The European Central Bank, the U.S. Federal Reserve and the Bank of England are all seen retaining their ultra-loose monetary policy for at least another year.

So that leaves the big emerging economies as the best hope for propping up global growth but they are also struggling.

Brazil's central bank slashed its key interest rate to 12 percent from 12.5 percent on Wednesday in a shock decision that it said reflects a mounting global slowdown as well as weaker growth in Latin America's largest economy.

While HSBC's China PMI rose to 49.9 last month it still pointed to slower growth and Taiwan's dropped to 45.2, the lowest reading since January 2009, the middle of the global financial crisis that crushed world trade.

Asian growth is set to slow more sharply than most expect over the coming months, Credit Suisse economist Robert Prior-Wandesforde wrote in a note to clients.

ORDERS DRY UP

The outlook is far from rosy as new orders in the euro zone fell for the third straight month. The sub-index fell to 46.0, down from the preliminary 46.9 reading and much lower than July's 47.6.

Switzerland, outside the 17-nation euro zone, said on Thursday its economy grew at its slowest pace since 2009, as a record strong Swiss franc also bites into exports.

China's new export orders index dropped to 48.3 from July's 50.4 and Beijing pinned the blame at least partly on the debt crises in advanced economies. The National Bureau of Statistics said the export sector was facing challenges.

Taiwan saw a sharp decrease in new export orders, particularly from Europe, while in South Korea the sub-index fell to a seasonally adjusted 48.86 from 52.13 , coming below the neutral point for the first time since October last year.

(Editing by Anna Willard)

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