* IMF raises 2010 growth forecast,says recovery will be slow
* Manufacturing strengthens in Asia
* Euro zone factory activity sluggish
* Euro zone ministers split on timing of stimulus withdrawal
* Euro zone unemployment rises in August
By Lesley Wroughton and Jonathan Cable
ISTANBUL/LONDON, Oct 1 (Reuters) - The IMF raised its growth forecast on Thursday for the world economy next year and manufacturing picked up across Asia and Europe, but policymakers were split over when to begin withdrawing fiscal aid.
Governments around the world have poured billions into the economy and cut interest rates to often historic lows to ease recession, but some economists fear that tightening policy too early or too sharply may derail still-fragile growth.
Euro zone manufacturing activity contracted less sharply than first thought in September, a survey showed, and Britain's manufacturing sector shrank modestly after employers cut jobs for a 17th straight month.
Manufacturing activity in September surged across Asia due to growing demand and a U.S. factory survey due later is set to show that growth accelerated slightly in the same month.
The International Monetary Fund said it expected the world economy to shrink by 1.1 percent in 2009, led by the swift turnaround in Asia, before growing by 3.1 percent in 2010, more upbeat forecast than its last report in July.
But it cautioned that the pace of a recovery was expected to be sluggish for some time and the biggest risk was if governments withdrew support measures too soon.
Ben May at Capital Economics said the euro zone data were encouraging: "Nonetheless we still think it is unlikely there will be a robust 'V' shaped recovery in the industrial sector."
Euro zone finance ministers are split on when to start withdrawing fiscal support to the economy, with some ready to say 2011 would be the starting point and others keen to avoid any date-setting.
The European Commission has said most European Union countries should start cutting their ballooning budget deficits from 2011 to prevent debt from spiralling out of control.
"Every country will have to define its exit strategy in its own due time. I don't think that we can have a precise, or a common schedule," Portuguese Finance Minister Fernando Teixeira dos Santos told reporters before a meeting of ministers in Gothenburg, Sweden. "We need a flexible approach on that."
ECONOMIES STILL FRAGILE
Germany's manufacturing sector came close to returning to growth in September on a jump in output and new orders, after the economy pulled out of recession in the second quarter.
Factories in France, the euro zone's second-largest economy, boosted activity to its fastest level in 19 months in September.
But recovery momentum has slowed in the euro zone as a whole and exports have stalled due, in part, to a strong currency.
"While output and orders rose at increased rates, the pace of expansion was lacklustre, held back by signs of momentum waning in some countries, notably Germany, the Netherlands and Spain," said Chris Williamson at Markit. "Job losses were widespread as firms struggled with the resulting squeeze on profit margins, highlighting the fragility of the recovery."
Highlighting that outlook, the Bank of Japan's tankan survey showed big manufacturers plan to cut capital spending by a record 25.6 percent in the fiscal year through March 31, more than indicated in a June survey.
Capital spending has typically been a growth driver for Japan's economy, but is now one of its weakest links as firms cut expenditure to protect fragile profits.
A recent series of surprisingly weak U.S. economic reports is casting doubt on a rebound in consumer demand that is vital for a strong global recovery.
German retail sales fell by 1.5 percent on the month in August, bucking expectations of a small rise and suggesting consumers in Europe's largest economy remain wary.
Job creation, vital to a durable economic recovery, stabilised in Australia after 20 months of declines but euro zone employers continued to shed jobs.
Euro zone unemployment rose to 9.6 percent in August, surpassing July's 10-year high of 9.5 percent.
While major Western economies are set for a slow and return to growth, Asian emerging markets are powering ahead.
Factories ramped up production in China, Japan, South Korea, India and Australia last month with new orders picking up from buyers at home and abroad. Some Asian companies such as Japanese construction equipment maker Komatsu have reported a sharp rise in sales to China in particular as its growth jumps. (Additional reporting by Wayne Cole in SYDNEY, Jason Subler in BEIJING, Yoo Choonsik in SEOUL and Hideyuki Sano in Tokyo and Christina Fincher in London; Writing by Lin Noueihed; editing by Elizabeth Piper)