* China PMI shows factory activity declined in May
* U.S. manufacturing activity hits seven-month low
* Euro zone downturn eases slightly
* Data, Bernanke comments from Wednesday send shares plummeting
By Andy Bruce and Steven C. Johnson
LONDON/NEW YORK, May 23 (Reuters) - Chinese factory activity declined in May for the first time in seven months and U.S. manufacturing grew at its slowest pace since October, suggesting it may take a while before the global economy starts to pick up steam.
Thursday's downbeat business surveys from the world's two largest economies came a day after Federal Reserve Chairman Ben Bernanke spooked markets by hinting that the U.S. central bank could soon scale back monthly bond purchases, provided the economy maintained its recent momentum.
Stock markets around the world tumbled after Bernanke's remarks and extended losses after the Chinese factory data was released.
Separate surveys showed the downturn in the 17-country euro zone eased slightly this month, though businesses continued to suffer from a chronic lack of new orders, which should inhibit a near-term recovery.
Financial data firm Markit said that in the United States, falling overseas demand and domestic belt-tightening pushed the U.S. Manufacturing Purchasing Managers Index to a seven-month low of 51.9 in May from 52.1 the previous month. A reading above 50 indicates expansion.
Chris Williamson, Markit's chief economist, said the data suggested that manufacturing, which had its best quarter in two years during the first three months of 2013, would provide only a modest boost to overall U.S. growth in the second quarter.
But recent improvement in the U.S. labor market and rising home prices have suggested the U.S. economy is recovering more quickly than its peers.
That has raised the prospect that the Fed could, as Bernanke suggested, reduce its $85 billion in monthly bond purchases at one of its "next few meetings," a scary prospect for stock and bond investors who have grown accustomed to support from the U.S. central bank.
"You can argue both sides, as you see some indicators that are clearly improving and others that are still weak, and that shows how difficult a position the Fed is in," said Omer Esiner, market analyst at Commonwealth Foreign Exchange. "But the propensity seems to be to wind down sooner rather than later."
Policymakers in Beijing are also facing a dilemma, which was underscored by the HSBC (LSE: HSBA.L - news) flash Purchasing Managers' Index that showed growth in China's massive manufacturing sector contracted in May for the first time in seven months.
Officials must decide whether to provide stimulus of their own to boost the sector or tolerate a slowdown while focusing on reducing China's dependence on exports and investment, changes economists say would bring long-term benefits.
"We don't think it will trigger any cyclical policy move as long as the job market is fine," she said. "China is really on a path of structural deceleration. It's possible (to meet the official growth target), but it's becoming increasingly difficult."
"Hopes of a significant recovery (in China) are looking misplaced," added Andrew Kenningham, global economist at Capital Economics in London. "If you look at the global picture overall, it's slightly weaker than expected but not dramatically so."
LIGHT AT THE END OF EUROPE'S TUNNEL?
The euro zone PMI suggested the bloc's economy is likely to contract again in the second quarter.
Markit's flash Eurozone Services PMI, which surveys around 2,000 companies ranging from major banks to caterers, rose in May to 47.5 - a three-month high - from 47.0 in April.
While that was a little better than economists polled by Reuters had expected, the PMI has now spent 16 straight months below 50, the threshold that divides growth and contraction.
"That said, a noticeable recovery is still not in sight; the economy will only grow slightly in the coming quarters and it will continue to feel like a recession," he added.
Survey compiler Markit said the surveys pointed to a second quarter contraction similar to the 0.3 percent dip the euro zone suffered between January and March.