* U.S. jobless claims hit record, manufacturing contracts
* S&P downgrades Britain's outlook, AAA rating at risk
* Fears of U.S. ratings cut weigh on stocks, bonds, dollar
* Euro zone PMIs show slowing contraction
* Geithner says U.S. regulatory reforms coming soon
By Caroline Valetkevitch
NEW YORK, May 21 (Reuters) - Data from the United States on jobless claims and business conditions on Thursday dented hopes of a quick economic rebound but euro zone countries showed that the worst recession in six decades may be easing.
In Britain, prospects were clouded by a warning over government debt and political uncertainty as Standard & Poor's lowered its outlook to "negative" and said it might cut the country's precious triple-A credit rating.
"This is a reality check for the UK government," said Kenneth Broux, an economist at Lloyds TSB Corporate Markets.
Worries the United States may suffer a cut to its triple-A rating pushed down stocks, bonds and the dollar.
Investors fear the United States is "going the way of the UK," Bill Gross, co-chief investment officer at bond giant Pacific Investment Management, told Reuters.
All three major U.S. stock indexes closed down more than 1.5 percent, while European shares fell 2.1 percent, breaking five straight sessions of gains.
The benchmark 10-year U.S. Treasury note eased and the dollar dropped to its lowest level this year against major currencies.
"No one wants to admit it but there might be investors nervous enough with the extreme levels of indebtedness of the U.S. government so that just the thought of a downgrade would provide an excuse to sell dollars," said Matt Esteve, a trader at Tempus Consulting in Washington.
CHINESE RISKS, U.S. WEAKNESS
Chinese officials highlighted the risks facing the world's third-largest economy -- one of the few still growing.
Vice Premier Li Keqiang said while the government's $585 billion stimulus plan had yielded initial results, it was too early to hail an economic recovery.
"The international financial crisis is still spreading and its impact on the real economy is deepening," the official Xinhua news agency quoted Li as saying.
Jobless claims in the United States, the world's biggest economy and epicenter of the global crisis, rose to a record last week while new claims fell by 12,000.
Other data showed manufacturing in the U.S. Mid-Atlantic area shrank in May for the eighth straight month.
Treasury Secretary Timothy Geithner said the U.S. financial system was steadying from the taxpayer-funded bailout of banks but that care must be taken to ensure normal market forces are allowed to work.
Broad regulatory reforms should be unveiled in a few weeks, including protection for consumers, Geithner said, as the Obama administration faces the task of "striking the delicate balance between intervention and allowing market participants latitude to operate."
The Conference Board research firm suggested more promise for U.S. growth, with its index of leading indicators for April showing the first rise since June 2008.
In that vein, the Congressional Budget Office said the U.S. economy will likely start growing again in the second half of 2009 but that the jobless rate could peak at more than 10 percent against the current 8.9 percent.
The new reports came a day after the Federal Reserve, in minutes released from its April policy meeting, cut its outlook for U.S. growth over the next three years and said a full recovery could take five or six years.
EUROPE OFFERS PROMISE
Still, the euro zone offered some grounds for cautious optimism.
Markit's Eurozone Flash Services Purchasing Managers Index, a measure of service and manufacturing activity, rose to 44.7 in May from 43.8 last month, beating the consensus estimate.
May was the third month in a row the index picked up and took it to its highest level since October.
The PMI index showed France's economy performing more strongly than the euro zone as a whole. Markit said a recovery in France could be earlier than current forecasts of a rebound in the fourth quarter.
The rate of decline in the private sector in Germany, Europe's largest economy, was its slowest in seven months.
Predictions by some economists of a return to growth as early as the last quarter of this year are tempered with concerns that data may yet obscure more complex underlying weaknesses in the economy.
"It is grounds for hope that things will improve over the next few months," said Peter Dixon, an economist at Commerzbank. "I'm not getting carried away."
Elsewhere, the outlook was mixed.
South Africa, Africa's biggest economy, "faces a sharp cyclical downturn" after a prolonged boom, said Treasury Director-General Lesetja Kganyago, with the government having to manage borrowing carefully to avoid overburdening the country with debt.
Argentina's economy, Latin America's third biggest, grew a better-than-expected 2.7 percent in March from a year earlier, the government said, but many analysts say official data is downplaying the slowdown.
Singapore's economy shrank 14.6 percent in the first quarter at an annualized and seasonally adjusted rate, less than forecast, prompting the trade ministry to talk of signs the country's worst recession is bottoming out.
The small Southeast Asian state, a proxy for global trends due to its heavy exposure to international trade, saw its exports slip back in April after two months of growth, reinforcing a view that there is no clear recovery.
Singapore's April exports to the United States and Europe shrank by more than 30 percent and to China by 15 percent. (Reporting by Reuters correspondents worldwide; Editing by John O'Callaghan)