MADRID, Sept 1 (Reuters) - Spain's manufacturing sector continued to shrink in August at roughly the same pace as in July, a survey showed on Tuesday, fuelling concerns of a prolonged recession and delay of potential economic recovery.
The Market Purchasing Managers' Index on Tuesday nudged lower to 47.2 from 47.3 in July, while manufacturing output again declined below the 50 mark -- the dividing line between expansion and contraction -- after peeking above that level last month for the first time since January, 2008.
"The Spanish manufacturing sector appears to be stagnating, rather than entering full recovery mode during the third quarter," economist at Markit, Andrew Harker said of the survey.
Employment continued to decline, although at a slower pace for the second month running. The employment index has showed job cuts every month for the past two years.
However, there were some bright spots. New business rose for the second month in a row, albeit at a fragile pace. And those surveyed noted some signs of recovery in demand.
August's fall in input costs was also the smallest in their current ten-month period of decline. But, purchase prices still dropped sharply and those surveyed noted that some raw materials were cheaper.
Greater competition and pressure from customers led manufacturers to continue cutting prices, although at the slowest pace since November.
"The fact that firms continued to discount prices heavily in August in an attempt to boost demand highlights the present fragility of the wider economy," said Markit's Harker.
Data released earlier this week showed Spanish gross domestic product contracted at a worse-than-expected 1.1 percent in the second quarter from a quarter earlier, although that improved on the first quarter rate of -1.6 percent.
Still, this was in stark contrast with Germany and France, which both posted a surprise return to growth in the second quarter.
The Spanish government expects the overall economy to shrink 3.6 percent this year, as the implosion of a construction and housing sector boom continues to take its toll, and does not forecast quarterly growth to return until the second quarter of 2010. (Reporting by Elisabeth O'Leary; Editing by Andy Bruce)