* U.S. ISM manufacturing index at 54.2, highest since June 2011 * German factories grow, rest of Europe falls further behind * Slack demand drops Chinese output to 5-month low * UK manufacturing shrinks unexpectedly By Steven C. Johnson and Jonathan Cable NEW YORK/LONDON, March 1 (Reuters) - U.S. manufacturing activity expanded last month at its fastest clip in 20 months but Asian factories slowed and European output fell, indicating the U.S. recovery remains on more stable footing than the rest of the world's major economies. In the United States, rising demand lifted the Institute for Supply Management's factory purchasing managers index to its highest since mid-2011, helping the sector regain some momentum lost in the second half of last year. But a wild card in the U.S. recovery is the onset of wide-ranging federal spending cuts scheduled to kick in soon. It was a different story elsewhere, as weak demand at home slowed the pace of growth in China's dominant manufacturing sector to multi-month lows while all but two members of the 17-country euro zone saw manufacturing contract. "It's doubtful we'll see Europe emerge as a major global growth engine this year, therefore the burden is on the United States and Asia, China in particular," said Dean Maki, chief economist at Barclays Capital in New York. A separate survey from financial information firm Markit showed U.S. factory growth slowed a bit in February even as a rise in new orders helped output grow at its fastest pace in nearly a year. U.S. consumer confidence also rose in February as Americans were more optimistic about the job market. The U.S. economy nearly flatlined in the last three months of 2012 but was likely to rebound in the first quarter, with economists expecting growth of 1.8 percent But government belt-tightening in the United States could complicate things, particularly if $85 billion in broad spending cuts are allowed to go ahead. If that happens, the International Monetary Fund said it would likely cut its growth forecasts for the U.S. and world economies. The IMF has the United States growing 2 percent this year and the global economy 3.5 percent. Manufacturing in Canada grew at its fastest pace in five months in February, though that was blunted by data showing the broader economy grew just 0.6 percent in the fourth quarter, its worst quarterly performance in more than a year. Mexican factories' output grew at the slowest clip in more than a year in February while Brazil's manufacturing sector expanded for a fifth straight month. U.S. stocks were little changed and European shares slipped, weighed down partly by worries about global growth. ASIA WOBBLES, EUROPE, UK HURTING Economists hope Asia will continue to contribute positively to global growth, though data on Friday was a setback. China's official purchasing mangers index from the National Bureau of Statistics eased to 50.1 after seasonal adjustments in February, the weakest reading in five months and just above the 50-point level separating growth from contraction. A second PMI issued by banking group HSBC fell to a four-month low of 50.4 after seasonal adjustments, off January's two-year high and in line with a flash, or preliminary, reading late last month. But the bigger-than-expected retreat in the purchasing managers' indexes does not signal China's economy is slipping into another slowdown, analysts said. Instead, they show China's growth recovery this year would be mild, as widely expected. "Today's data point to a stabilisation of economic activities in coming months, not a strong recovery of growth," said Jian Chang, a Barclays analyst. Incoming European data certainly is not making life easier for euro zone policymakers. Germany, the bloc's largest economy, and Ireland were the only two members to see factory output grow last month. German retail sales also grew at the fastest monthly rate in more than six years in January, rebounding from a deep fall in December. But Markit's euro zone manufacturing PMI was unchanged at January's 47.9, held back by dismal performances in France, the bloc's No. 2 economy, Italy and Spain. The survey showed manufacturing shrank for the 19th month running. "Most of it is driven by Germany. Germany has outperformed the rest of the euro zone for quite a while now and that divergence is going to persist," said Evelyn Herman at BNP Paribas. Britain saw manufacturing contract unexpectedly in February as new orders dwindled, making it likely the sector will drag on economic growth in the first quarter in a country at risk of sinking into a triple-dip recession. Chances are rising that the Bank of England will rekindle its asset purchase program next week, a possibility boosted by figures showing mortgage approvals for home buyers dropped in January. In the euro zone, some 44 out of 55 economists polled by Reuters said the European Central Bank would have to step in and buy bonds from its struggling members. Inflation among the countries using the euro fell to 1.8 percent last month, according to official data released on Friday, while unemployment hit a new high in January of 11.9 percent, official data showed. The manufacturing surveys pointed to factories reducing headcount for the 13th straight month. SOUTH KOREA, INDIA In South Korea, trade data showed a sharp fall in exports, while a PMI report from last year's emerging market investor favorite Indonesia showed a slight improvement in manufacturing overall, but a fall in new export orders. Factory growth was stronger in India, which is struggling to escape the grip of its weakest economic growth in a decade, but there too the strength came from domestic demand, with export orders remaining subdued.