Euro zone manufacturing activity declined for a sixth straight month in January as a slight upturn in Germany failed to offset a prolonged contraction in the bloc's smaller economies, a survey showed on Wednesday.

Euro zone output did increase, for the first time since July, but new order levels continued to decline across the region suggesting it may be some time before the troubled currency union's economy returns to solid growth.

Markit's Eurozone Manufacturing Purchasing Managers' Index (PMI) rose to 48.8 last month from December's 46.9, revised up from a flash reading of 48.7 but recording its sixth month below the 50 mark that divides growth from contraction.

The output sub-index was revised up from an earlier reading of 50.0 to 50.4, from 47.1 in December.

The euro zone is expected to wallow in a mild recession until the second half of this year, according to a Reuters poll, but even that assumes the region's debt crisis will not flare out of control.

Fears that Greece could face a disorderly default if it does not quickly secure a debt swap deal with private creditors, or that Portugal might require a second bailout, continue to rattle investors and dent confidence.

The PMI's new orders index, at 46.5, was above December's 43.5 but still marked a contraction for an consecutive eighth month.

The concern is that new orders have yet to return to growth, even in Germany, suggesting that companies will be reluctant to expand capacity and take on more staff until signs of stronger demand have appeared, said Chris Williamson at data compiler Markit.

Earlier data from Germany, Europe's largest economy, showed its manufacturing sector expanded for the first time since September.

But in France the index has been below 50 since July and Spanish factories reduced activity for the ninth straight month while Italy's cut back for the sixth month running.

Greece and Ireland also witnessed a further contraction.

As the euro zone debt crisis is hurting business and consumer confidence across the region, policymakers are under pressure to come up with a solution quickly.

On Monday, most European Union states agreed to a German-led pact that will impose quasi-automatic sanctions on countries that breach EU budget deficit limits and will enshrine balanced budget rules in national law. That however will not solve euro zone countries' immediate debt problems.

The survey showed factories barely increased their workforce last month. Official data released on Tuesday showed unemployment in the euro zone hit 10.4 percent in December, its highest level since before the euro was introduced.

(Editing by Susan Fenton)

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