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NEW YORK, Feb 2 (Reuters) - U.S. factory activity slowed less sharply in January as a key gauge of manufacturing improved for the first time since June an industry report showed on Monday, but the sector remained under pressure amid the biggest recession in decades, analysts said.
The Institute for Supply Management said its index of national factory activity rose to 35.6 in January from a nearly three-decade low of 32.9 in December, exceeding economists' median forecast for a reading of 32.6. But the report still signaled a deep decline in activity, since a reading below 50 indicates contraction in the sector.
"Overall, this still is not a report that is highly encouraging. It simply says that maybe we're finding ourselves somewhere near the bottom," said Norbert Ore, chairman of the ISM manufacturing business survey committee in New York.
"Inventories are in a very strong liquidation mode," Ore said. "There is still a big inventory bubble that we have to work through in the first half of the year," Ore added.
U.S. stocks pared losses after the manufacturing data, while safe haven Treasury bonds pared gains. The dollar lost some ground against the euro in the wake of the report.
However some analysts took a cautiously optimistic view of the report.
"It's a positive sign because you're not seeing a deepening of the crisis," said Asha Bangalore, economist with Northern Trust in Chicago. "Both production and new orders could have dropped further and they haven't. Having said that, this is only a one-month indication. we need additional indications that recovery is on the way," Bangalore said.
The prices paid subcomponent index rose to 29.0 in January from 18.0 in December.
Manufacturing employment was unchanged from the month before, with a reading of 29.9 in January.
New orders rose to 33.2 in January from 23.1 in December.
"Manufacturing has a long way to go toward recovery and that may indicate we're somewhere near a bottom in terms of the rate of decline in manufacturing," Ore said.
(Additional reporting by Ellen Freilich and Deepa Seetharaman). (Reporting by John Parry; Editing by Theodore d'Afflisio)