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The European manufacturing industry’s contraction slowed more than initially estimated in July, adding to indications the worst recession in six decades may have bottomed out.

An index of euro-area manufacturing activity rose for a fifth month, increasing to 46.3 from 42.6 in June, Markit Economics said today. The July figure is the highest in 11 months and exceeds the initial estimate of 46 on July 24. The index is based on a survey of purchasing managers by London- based Markit and a reading below 50 indicates a contraction.

Companies from Air Liquide SA to Bayer AG last week posted earnings that beat analysts’ estimates and European stocks rallied for a third week as signs of a global recovery improved prospects for the euro region. The U.S. economy, the world’s largest, shrank at a slower pace in the second quarter after contracting the most in 27 years in the prior three months.

“The sharp improvement in the manufacturing purchasing managers’ survey in July boosts hopes that the euro zone could return to modest growth before the end of the year, and conceivably even in the third quarter,” said Howard Archer, chief European economist at IHS Global Insight in London.

The euro turned higher against the dollar and European shares extended gains after the data. The European currency was up 0.2 percent at $1.4286 at 11:07 a.m. in London. The Dow Jones Stoxx 600 Index rose 1.7 percent to 228.76 and has surged 44 percent since March 9 on better-than-estimated company results.

Health-Care Orders

Paris-based Air Liquide, the world’s biggest maker of industrial gases, said on July 30 that first-half profit was little changed at 596 million euros ($849.7 million), beating analyst estimates on cost cuts and rising health-care orders. Cutting costs also helped Bayer, Germany’s largest drugmaker, to beat forecasts with second-quarter earnings personal business cards.

In the U.S., manufacturing probably shrank in July at the slowest pace in 11 months, economists said ahead of a report due today from the Institute for Supply Management. Former Federal Reserve Chairman Alan Greenspan said yesterday that the U.S. recession may be ending and growth may resume at a rate faster than most economists foresee.

Factory activity in the U.K., the euro region’s largest trading partner, expanded for the first time in 15 months in July, separate data showed today. Manufacturing in China, the biggest source of euro-area imports, grew the most in a year.

‘Modest Recovery’

The euro region will experience a “modest recovery” next year, the International Monetary Fund said in a report last week. The Washington-based lender with 185 member nations sees the 16-nation economy shrinking 0.3 percent in 2010 after a 4.8 percent contraction this year.

The European Central Bank forecasts the region’s economy will resume expansion in the middle of next year. While evidence mounts that the worst of the recession is over, rising unemployment may hamper the recovery as consumers cut back on spending. European retail sales fell for a 14th month in July, the Bloomberg purchasing managers index showed last week.

The ECB, which has pumped billions of euros into markets to support lending, kept its benchmark rate at a record-low 1 percent on July 2 and has started buying as much as 60 billion euros of covered bonds, securities backed by mortgages and public-sector loans, to boost lending.

“The recession is easing quite sharply in the euro zone,” said Jennifer McKeown, an economist at Capital Economics in London. “But it’s too soon to hope for any meaningful recovery.”

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