* Gain driven by foreign demand for capital goods
* Economy Ministry sees brighter prospects for output
(Adds economist comment, background)
By Sarah Marsh
BERLIN, Aug 6 (Reuters) - German manufacturing orders rose at their fastest pace in two years in June on strong foreign demand, particularly for capital goods, in a sign the industrial sector in Europe's largest economy is staging a recovery.
Adjusted for seasonal swings, orders rose by 4.5 percent on the month, the biggest gain since June 2007 and the fourth consecutive monthly rise, the Economy Ministry said on Thursday. A Reuters poll of economists had pointed to a 0.8 percent rise.
"This is a further sign of stabilisation. But we are still a long way off a self-supporting recovery," said Deutsche Bank analyst Stefan Bielmeier. "Domestic demand is also very weak and should remain so given the expected increase in unemployment.
"What is pleasing is that demand for capital goods has increased. It is questionable how sustainable that is," he said.
Foreign orders rose by 8.3 percent, with those from other euro zone countries increasing by 13.2 percent. Foreign orders for capital goods gained 12.5 percent, with demand from the euro zone surging by 17.5 percent.
German manufacturing orders had fallen steadily since the end of 2007, but reversed the downward trend in March and rose 4.4 percent in May.
"The stronger drivers are currently coming from abroad, but domestic orders are also rising noticeably," the ministry said in a statement. "This shows that the prospects for industrial production in the coming months have further improved."
The rise in orders adds to a recent run of positive reports on the economy. Data from Markit on Monday showed that Germany's industrial sector contracted at its slowest pace in 10 months in July. [ID:nLAG003625]
Business morale rose for a fourth month running in July, hitting its highest level since October, and unemployment unexpectedly fell for the first time in nine months.
Some German engineering companies are upbeat. Gildemeister
The ministry said domestic orders were up by 0.2 percent. Demand for intermediate goods gained 4.6 percent, while orders for investment goods rose 5.0 percent. (Reporting by Sarah Marsh, editing by Mike Peacock)