China's factory output surged for a fourth month in July, data showed on Monday, while two of Britain's biggest banks emerged from a year of financial turmoil in profit but damaged by bad debts of a combined $21 billion.

British manufacturing activity grew for the first time since March 2008, adding to evidence that the world's fifth biggest economy was over the worst of the recession, while the deterioration of the euro zone's factory sector looked closer to ending in July, surveys suggested.

That included modest output growth in three of the bloc's biggest economies, Germany, France and Spain.

The equivalent index for July from the US Institute for Supply Management is due at 1400 GMT, with a Reuters survey forecasting a reading of 46.2 compared to 44.8 in June.

"In the industrial sector there's a very promising rebound and the economy will probably evolve much better than previous estimates," said Simon Junker at Commerzbank. "We expect positive growth in the second half of the year."

An improving economic backdrop and upbeat quarterly company earnings have driven the world's stock markets around 55 per cent up since they bottomed out in March.

Stock markets were up again on Monday, the 13th gain in the last 16 sessions, while the dollar hit its lowest level in 2009.

But the jury is still out on whether the numbers point to a sustained recovery or just stabilisation of the world economy, while the manufacturing surveys may also simply show that firms have finished running down stocks.

The data from China, an engine of growth for the world economy in the last decade, showed a key gauge of factory output hit a one-year high, but it was spurred by domestic orders rather than still anaemic exports to the West.

Other data published on Monday showed government measures to boost demand for new cars supported European car sales in July, with French sales rising 3.1 per cent.

German retail sales, though, fell unexpectedly by 1.6 per cent year-on-year in June, denting hopes that consumer spending would help bring Europe's biggest economy out of the worst recession since World War Two.

"In Western Europe we see possible signs of stabilisation.

However, talking today about green shoots would not be prudent," said Eckhard Cordes, chief executive of German retailer Metro -- the world's fourth largest -- after it posted falling second-quarter sales and profits.

"Clear signs for a fast economic upswing after the severe downfall are so far not discernible ... We expect that retail sales will further decline in the coming months."         

Risky gains

The stock market rally has been underpinned by the results of several of the world's biggest banks -- the European banking stocks index is up 144 per cent since March.

But those gains have come mainly from the risky investment banking business that started the credit crunch, rather than ordinary retail banking to companies and consumers.

Barclays Plc fell short of expectations with an 8 per cent rise in half-year profit as bad debts almost doubled to offset earnings from an investment banking arm that swallowed much of US investment Lehman Brothers after its collapse last September.

Impairments and credit provisions on loans that have soured jumped 86 percent to 4.56 billion pounds for the half year.

HSBC Holdings, Europe's biggest bank, said its first half profits halved from last year to $5 billion as it was hit by rising bad debts in the US, Europe and Asia.

HSBC reported a pre-tax profit for the six months to the end of June of $5.02 billion, down from $10.2 billion a year earlier but just ahead of an average forecast of $4.9 billion from 11 analysts polled by Reuters.

"It may be that we have passed, or are about to pass, the bottom of the cycle in the financial markets," Chair