* China July factory activity weaker than feared
* Soft China demand weighs on its export-reliant Asia neighbours
* Beijing expected to roll out even more stimulus measures
* Factory activity in Taiwan, South Korea and Indonesia also weak
* UK, Europe, US PMIs due later in the day
By Ian Chua
SYDNEY, Aug 3 (Reuters) - Headwinds for the world's second-biggest economy intensified at the start of the third quarter, with manufacturing conditions in China deteriorating to their worst in two years in July and triggering fresh slides in global commodity prices.
Similar business activity surveys for Taiwan, South Korea and Indonesia - all heavily reliant on Chinese demand - reflected varying degrees of weakness that is clouding hopes for a convincing global recovery in the second half of the year.
With Greece's latest debt squeeze resolved, for now, investors' focus will shift back to sluggish European growth and whether the U.S. economy has healed enough to withstand its first expected increase in interest rates since 2006.
As emerging economies appeared on track to post their smallest share of global growth in years, the hope is for continued recovery in the United States and Britain. Manufacturing surveys for both countries, along with Europe, are due later in the day.
Both U.S. and UK data in recent weeks has been mixed, adding to doubts about whether they are on a sounder and sustainable footing.
"We believe the macro environment remains challenging for emerging market assets amid headwinds of low commodity prices, concerns over China and a looming Fed tightening cycle," Barclays (LSE: BARC.L - news) strategists wrote in a daily note in clients.
China's factory activity shrank more than initially estimated in July as new orders fell, dashing hopes that the world's second-largest economy may be steadying, a private survey showed on Monday.
The final Caixin/Markit China Manufacturing PMI came in at 47.8 in July, from 49.4 in June, sinking deeper below the 50-mark that divides growth from contraction.
A similar official factory survey at the weekend was also weaker than expected, suggesting growth had stalled.
Both indicators signalled a slowdown in factory activity at a time when Beijing has been intervening heavily to prevent a full-blown crash in the country's stock markets.
"My view is that they are distorted numbers due to the stock market panic. If that's the case, it's a transitory dip and given the amount of stimulus that has been put in place, we should expect a bounce back in the August numbers," said ING economist Tim Condon.
"But the economy can hardly afford much of a headwind, so probably it brings forward the timing of when people expect the next (policy) move from the authorities."
China's central bank has already cut interest rates four times since November and repeatedly loosened restrictions on bank lending in its most aggressive stimulus campaign since the global financial crisis.
Analysts at Nomura expect another 50-basis-point cut in banks' reserve ratio and one more quarter-point easing in interest rates, likely in August.
Yet, a senior Chinese central bank official predicted that downward pressure on the economy will persist in the second half of the year, saying growth in infrastructure spending and exports were unlikely to pick up.
The frosty state of China saw South Korean exports fall for a seventh month in July, while economic growth in Taiwan cooled to its slowest in three years in the second quarter.
China's slowdown is also forcing Western companies to take a hard look at their businesses, leading many to reduce investments, costs and product lines.
"In terms of external demand, loose monetary conditions and lower energy prices should support a pick-up in global activity in the coming quarters," Krystal Tan, Asian economist at Capital Economics wrote in a report.
"However, the pace of recovery is likely to be gradual, suggesting a strong rebound in Asia's export performance is still some way away."
Providing a bit of relief, manufacturing activity in Japan and India both picked up in July thanks to new orders, though analysts questioned if the momentum can be sustained.
Japan's Manufacturing PMI climbed to a five-month high of 51.2, from 50.1, while India's Manufacturing PMI rose to a six-month high of 52.7, from 51.3.
"While this is a generally positive set of data, upcoming PMI data releases will indicate whether the manufacturing sector can sustain this momentum," said Pollyanna De Lima, economist at Markit (NasdaqGS: MRKT - news) and author of the Indian PMI survey.
(Editing by Kim Coghill)