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An employee works at a steel factory that exports to Europe and America in Jiaxing, Zhejiang province, February 28, 2013.WILLIAM HONG/Reuters

Economic malaise in the euro zone deepened in March even before another member country ran into debt trouble, but manufacturing in the United States and China improved, surveys showed on Thursday.

Solid growth in the United States and China, the world's largest economies, will be important for overall global growth, particularly as the 17-country euro zone continues to struggle.

Markit's Flash Euro zone Composite Purchasing Managers' Index, seen as a reliable economic growth indicator for the bloc, fell more than expected to 46.5 in March from 47.9 in February.

Most responses to the survey were received before Cyprus' parliament rejected a bailout that included an unprecedented levy on all bank deposits, leaving the country perilously close to financial collapse.

"The sharp decline in the flash composite PMI in March pours cold water on hopes of an imminent end to the euro-zone recession," said Martin van Vliet, economist at ING.

"If the situation surrounding Cyprus spirals out of control, the onset of recovery might well be delayed."

French businesses had their worst month in four years, likely pushing the euro zone's second-biggest economy into recession. Germany also showed signs of fatigue.

Things were a bit sunnier in the United States and Asia.

Markit's Flash U.S. Manufacturing Purchasing Managers Index rose to 54.9 this month from 54.3, and the pace of hiring in the sector increased.

A separate Philadelphia Federal Reserve Bank report showed factory activity in the mid-Atlantic region grew in March.

"With manufacturing a reliable bellwether of the rest of the economy, gross domestic product will have risen at a much improved rate" over the first three months of 2013, said Chris Williamson, chief economist at Markit.

The U.S. economy grew at a 0.1 per cent rate in the fourth quarter of 2012, but economists are forecasting a first-quarter growth rate of about 2 per cent.

Another hopeful sign for the United States: sales of existing homes hit a three-year high in February and prices rose. That suggests a recent acceleration in the housing market recovery continued.

In China, factories increased their output after a holiday dip, suggesting solid, if not spectacular, first-quarter growth for the world's No. 2 economy.

The HSBC China PMI for March rose to 51.7 from 50.4, but remained below a two-year high reached at the start of the year.

The pullback in February had raised concerns in financial markets that China's recovery was losing steam. Government data earlier in March suggested the economy had started 2013 with only tepid growth after a burst in the fourth quarter.

But the HSBC report allayed some of those fears.

"Current readings ... seem to us to be consistent with GDP (gross domestic product) growth close to 8 per cent year-on-year," wrote Dariusz Kowalczyk of Credit Agricole-CIB in Hong Kong.

Markit, however, said conditions in Europe could worsen by the end of the month.

"Events that hit business confidence can have a very rapid effect on the data and so there is good reason to believe that responses we collect this week will on average be more negative," Williamson said, referring to the Cyprus confusion.

The latest PMI data, having already contracted since the second quarter of last year, suggested the euro zone economy would shrink 0.3 per cent in the current quarter, Markit said.

That is worse than the 0.1 per cent contraction predicted in a Reuters poll last week that also forecast negligible growth next quarter.

Germany's composite PMI fell in March, although it held above 50 for the fourth month, suggesting some strength in Europe's largest economy.

Some of the factory activity in the euro zone was generated by running down order books while incoming new business for services firms dropped at the fastest pace since October, suggesting next month's PMI will also be weak.the bad news on Cyprus really hit, so you have to wonder what impact that will have on business sentiment," Williamson said.

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