UPDATE 1-Philly Fed factory activity turns positive

*Measure shows first growth in 10 months

*New orders highest since Nov, 2007

*Positive turn hints US recession over or ending (Adds detail, market reaction, analyst comments)

By Ros Krasny

CHICAGO, Aug 20 (Reuters) - Factory activity in the U.S. Mid-Atlantic region turned positive in August as a jump in new orders broke a 10-month streak of contraction, a survey showed on Thursday.

The Philadelphia Federal Reserve Bank's index is watched for signs of the health of the U.S. manufacturing sector, and August's stronger-than-expected measure was another hint that the long recession is at or near an end.

"The Philly Fed was a little bit of surprising good news. It adds to those who are hopeful of a recovery," said Kim Rupert, managing director, global fixed income analysis, with Action Economics LLC in San Francisco.

The survey's business activity index rose to 4.2 in August from minus 7.5 in July, exceeding even the most optimistic forecasts and reaching its highest point since November 2007.

Economists polled by Reuters had forecast a reading of minus 2.0, in a range of minus 8 to plus 3. Any reading above zero indicates expansion in the region's manufacturing sector.

The survey covers factories in a region encompassing eastern Pennsylvania, southern New Jersey and Delaware.

New orders rose to 4.2 from minus 2.2 in July, also the highest since November 2007. The employment index rose to minus 12.9 from minus 25.3 last month.

Respondents to the bank's survey were more optimistic about business conditions in the next six months, even though they looked for new orders to rise only marginally in that time.

Many economists have looked for a turn in the inventory cycle to mark the end of the recession, and the survey showed inventories at 0.3 in August against minus 15.4 last month.

"The combination of the inventory cycle, and the impact of special factors like the cash for clunkers (program), will probably see manufacturing sector data overstate the general improvement in the economy," said Alan Ruskin, chief international strategist at RBS Securities in Greenwich, Connecticut.

"Nonetheless, this data can be considered as solidly growth- and risk-friendly," Ruskin said.

The report helped U.S. equities markets hold early gains and kept Treasury prices on the defensive.

"After earnings season, both bulls and bears need to see evidence of whether the economy is continuing to show improvement," said Lawrence Glazer, managing partner of Mayflower Advisors in Boston. "This data would support that argument." (Editing by Dan Grebler)