UPDATE 1-Manufacturing and lending data augur well for UK economy
* British manufacturing sustains momentum through February
* Mortgage applications surge, highest since Nov 2007
* Sterling cuts losses vs dollar, gains vs euro
LONDON, March 3 (Reuters) - British manufacturing strengthened last month and mortgage approvals hit their highest level in January since November 2007, data showed on Monday, underlining the momentum behind the country's economic recovery.
Hiring in factories picked up at the fastest rate since May 2011, according to a survey gauging manufacturing activity, while new orders continued to pile in.
The surprisingly swift economic revival has been driven largely by consumer spending and an upturn in Britain's housing market, which shows no signs of abating.
Figures from the Bank of England showed lenders approved 76,947 mortgages in January, the most since near the start of the financial crisis, compared with 72,798 in December and more than forecast by analysts.
But there was another fall in lending to businesses, even if the pace of decline slowed, in a reminder that the recovery has yet to take hold fully in other areas of the economy.
The Bank of England has said exports and business investment will need to strengthen in 2014 for growth to last, while finance minister George Osborne has said he plans to help boost investment and exporters in his budget due on March 19.
"Today's CIPS manufacturing survey data for February provided further upbeat signs for the health of the UK economy," said Andrew Goodwin, senior economic adviser to the EY ITEM Club.
"Admittedly, the latest BoE data on lending in January points to credit to firms continuing to fall. But the large cash piles that many firms have built up should provide the resources to fund further growth in investment."
Sterling cut its losses against the dollar and rose against the euro after the data, while British government bonds tracked Bunds higher on the day as the Ukraine crisis spurred investors to seek safe haven assets.
The Markit/CIPS Manufacturing Purchasing Managers' Index (PMI) ticked up to 56.9 from 56.6 in January, higher than the 56.5 expected by economists in a Reuters poll. Readings above 50 point to growth in activity.
That meant British manufacturing activity expanded faster last month than in all of its major European peers.
The employment subindex rose at its fastest pace since May 2011, as companies came under strain to meet demand with existing capacity. Manufacturing accounts for around a 10th of Britain's economy.
"The survey suggests we should expect another quarter of robust economic growth in the first quarter," said Rob Dobson, senior economist at Markit, which compiles the survey.
Overall, the PMI suggested manufacturers were mostly unbowed by the floods that have submerged swathes of southwest England. A report from Fitch ratings agency on Monday also showed insurers should find losses from the bad weather manageable.
Economists polled by Reuters expect the economy will grow around 0.6 percent from quarter to quarter this year, with house prices set to rise strongly.
House prices rose in February in more regions of England and Wales than at any time in nearly 10 years, a separate survey showed on Monday.
Despite January's surge in mortgage approvals, levels are still short of levels of around 90,000 a month seen before the 2008 financial crisis.
BoE Governor Mark Carney and other officials have played down suggestions that the housing market is overheating.
The central bank said that lending to non-financial businesses fell again in January, down 0.6 billion pounds after a steeper fall of 1.7 billion pounds in December.
"With the UK sustaining a decent level of economic activity and prospects looking pretty bright, business demand for credit will likely pick up appreciably over the coming months," said Howard Archer, economist at IHS Global Insight.
The BoE also released usage statistics for its Funding for Lending Scheme (FLS), introduced with the government in 2012 to boost lending to households and businesses.
Net lending by FLS participants was 5.8 billion pounds ($9.7 billion) during the fourth quarter of 2013, down slightly from an upwardly revised 6.2 billion pounds in the third quarter.
Lloyds Banking Group topped the list of lenders under the scheme, followed by Nationwide Building Society.
But Royal Bank of Scotland and Santander UK cut their net lending by 2.3 billion pounds and 1.4 billion pounds, respectively, continuing the shrinkage in their loan books that has seen them cut lending by a combined 23 billion pounds since the last 18 months.
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