* U.S. Senator Reid rejects House Republican proposal
* German investor sentiment and eurozone factory output rise
* Rio raises copper output forecast for 2013
By Freya Berry and Maytaal Angel
LONDON, Oct 15 (Reuters) - Copper fell on Tuesday as divisions between lawmakers in Congress over extending the U.S. government's borrowing limit weighed on investors who were already concerned about a growing market surplus.
Optimism over a last-minute deal to raise the debt ceiling and eliminate the risk of a U.S. default waned on Tuesday after Senate leader Harry Reid said a plan promoted by House Republicans could not win approval.
The Treasury is due to run out of money on Thursday, though markets remained hopeful a deal will be reached.
Copper prices bounced last week from the bottom end of a $7,000-7,500 range that has been in place since early August, but momentum appears to be stalling, with risk appetite constrained until U.S. lawmakers forge an actual deal on the debt problem.
"I think that at some point the market participants will see that copper at the current levels is not reflecting the fundamentals," said Eugen Weinberg, an analyst at Commerzbank.
Weinberg added that signs of restocking in China should have lifted copper from its current doldrums. Data on Monday showed that copper imports from China, the world's top copper consumer, jumped 18 percent in September, reversing from a fall in August, as importers boosted orders ahead of a seasonal pickup.
Benchmark three-month copper on the London Metal Exchange eased 0.2 percent to close at $7,240 a tonne, after gaining 0.8 percent in the previous session.
Weighing on copper, global miner Rio Tinto raised its forecast copper output for 2013 after a better-than-expected recovery at its landslide-hit U.S. Kennecott mine and it posted record iron ore and coal output in the third quarter.
"Despite a 'steady-as she-goes' near-term growth trajectory now evident across the largest global economies, we are not seeing a corresponding push higher in base metal prices," INTL FC Stone analyst Ed Meir said.
"This is because investors remain rightfully wary about ... supply given the surpluses that are being projected for both this year and next."
On the upside, data out earlier showed German analyst and investor sentiment rose unexpectedly in October, while on Monday, euro zone August factory output beat expectations, jumping 1.0 percent.
Also, Chinese Premier Li Keqiang was quoted as saying on Tuesday that China, which consumes 40 percent of the world's copper, has the basic foundations to meet its major economic targets this year and that the upward trend of the economy would continue.
The Chinese government has set an annual target of 7.5 percent growth for its gross domestic product in 2013.
Improving global growth helped copper stocks on the LME fall by 5,150 tonnes to 503,425 tonnes, their lowest since early March, the latest daily data from the exchange showed. Overall LME copper stocks have dropped almost 17 percent since Sept. 3.
While a lot of these falls might be linked to improved demand from China, some investors are reluctant to place too much emphasis on a bullish Chinese growth outlook.
Barclays said in a note that Chinese copper demand could lose some momentum into the year-end as power sector spending peters out, with September grid investment falling 15 percent in 2013's first year-on-year decline.
Aluminium closed down 1.1 percent at $1,849 a tonne in ring trading, with daily LME data showing stocks of the metal jumped by more than 20,000 tonnes to 5.34 million tonnes.
Zinc and nickel finished trading flat at $1,929 and $14,000, respectively. Lead closed up 0.6 percent at $2,143, and tin lost 1.1 percent to $23,075.
Three month LME copper CMCU3
Most active ShFE copper SCFcv1
Three month LME aluminium CMAL3
Most active ShFE aluminium SAFcv1
Three month LME zinc CMZN3
Most active ShFE zinc SZNcv1
Three month LME lead CMPB3
Most active ShFE lead SPBcv1
Three month LME nickel CMNI3
Three month LME tin CMSN3