Philly Fed factory activity index worst in 2-1/2 yrs

NEW YORK (Reuters) - A gauge of factory activity in the Mid-Atlantic region plummeted in August, falling to the lowest level since March 2009 and casting more doubts on the strength of the economic recovery, a survey showed on Thursday.

The Philadelphia Federal Reserve Bank said its business activity index dropped to minus 30.7 from positive 3.2 the month before and was far below economists' expectations for positive 3.7, according to a Reuters poll. It missed the poll's lowest forecast for minus 10.0.

It was the biggest month-over-month drop since October 2008, during the heart of the credit crisis.

Any reading above zero indicates expansion in the region's manufacturing. The survey covers factories in eastern Pennsylvania, southern New Jersey and Delaware.

It is seen as one of the first monthly indicators of the health of U.S. manufacturing leading up to the larger national report by the Institute for Supply Management.

U.S. stocks extended losses immediately following the report, sending the S&P 500 down more than 4 percent. U.S. Treasuries prices added to gains, while the dollar extended its gains against the euro.

New orders fell to minus 26.8 from positive 0.1. The employment components worsened, with the gauge of the number of employees falling to minus 5.2 from positive 8.9, and the average work week index dropping to minus 14.4 from minus 5.4.

"It looks pretty bad across the board, especially with new orders," said Gus Faucher, director of macroeconomics at Moody's Analytics in West Chester, Pennsylvania.

"It shows demand is softening. Businesses are anxious at this point."

Survey respondents' view on the coming months also deteriorated with the gauge of business conditions for the next six months falling to 1.4 from 23.7. The index was at its lowest since November 2008.

(Reporting by Leah Schnurr, Editing by Chizu Nomiyama)