A stumble in sentiment dented hopes of a rapid rebound from recession in the euro zone's services-led economy and the European Union and United States faced off against China in a looming dispute over raw materials.

Euro zone purchasing managers figures on Tuesday showed the recovery had stalled, although manufacturers fared better as, aided in part by government stimulus measures, they ran down stocks of goods to new lows.

In Washington, the U.S. administration readied measures to stem unemployment, while the United States and European Union were expected to launch a World Trade Organization case against China over its export restrictions on base materials, industry sources said.

A Chinese central bank official said the country's economy was headed in the right direction and should recover faster than many others'. But the foundations of the rebound were not yet solid, he said, joining a chorus of voices cautioning against hopes of a quick upturn.

The recovery is not there yet. We are going to get out of recession slowly in the second half and we're not going to see a sharp V-shaped recovery, said Olivier Gasnier, analyst at Societe Generale, after weaker-than-expected French consumer spending figures.

The world economy is struggling to overcome problems stemming from last year's housing and financial market meltdown against a background of continued tight credit conditions, the corporate sector's reluctance to spend and mounting job losses.

The European Central Bank was expected to give a boost to banks' attempts to fund their balance sheets by allotting 300 billion euros in its first 1-year refi auction.

The ECB set a call for bids at 9:30 a.m. EDT on Tuesday and the auction should be effective in bringing down rates at the short end of the money curve, according to a Reuters poll of traders.


U.S. Trade Representative Ron Kirk was expected to launch WTO action against China at a news conference on Tuesday, industry sources said, though his office gave no details.

Barack Obama, who has focused his first five months as president on trying to end the recession, was likely to outline plans to create jobs and stem unemployment, which economists expect to hit 10 percent in coming months.

In the euro zone, surveys hinted that the worst of a dark recession had passed, but that a recovery may well take time to take root.

In France consumer spending fell by more than expected in May, underlining concerns about fragile domestic demand, while in Germany a purchasing managers' index showed the rate of contraction in Germany's private sector accelerated in June.

The PMI data added to signs Europe's largest economy faces a bumpy recovery from record recession and overshadowed a report by German GfK market research group that consumer sentiment was poised to push up.

Chris Williamson, chief economist at financial information company Markit, said the German PMI data highlighted concerns that recovery was going to be difficult.

We may see some plateauing and ... the economy still contracting as we move through the rest of the year, he said.

Concern that a recovery in the global economy could take longer than expected left European shares in the doldrums, inching lower after falling sharply in the previous session and jittery after U.S. shares suffered their worst one-day loss in two months on Monday.


The data in Europe came after Su Ning, a vice-governor of the People's Bank of China, said he hoped his country would be among the first economies to recover from the crisis.

But he cautioned that the pick-up was still not firmly anchored and expressed particular concern about the grim international environment for Chinese exporters as the financial crisis continues to take a toll on global growth.

The U.S. unemployment rate, at 9.4 percent already its highest in about 25 years, is likely to hit 10 percent in the next couple of months, a White House spokesman said on Monday.

Figures on U.S. housing data due later on Tuesday will be an important test for nervous markets, while the Federal Reserve's interest rate setting committee begins its two-day meeting.

While no changes are expected in the short-term, with interest rates near zero, attention is focused on whether the Fed will expand its purchases of government debt from the $300 billion already pledged to fight the recession.

(Writing by Keiron Henderson; Editing by John Stonestreet)