* Czech, Polish decline slows
* Improvement in Germany is key for coming months
* No big turnaround, more policy support needed in Poland
By Jan Lopatka
PRAGUE, Feb 1 Recession in Central Europe's industrial sector eased a little further in January, with surprisingly strong data from Hungary and the Czech Republic reflecting steadier demand from main export market Germany.
Central European economies have been squashed by weak demand in the west as well as by budget-cutting measures at home that have knocked down consumption.
Purchasing Managers' Indices in the Czech Republic and Hungary came in above expectations while in Poland the indicator showing current and expected output shrank less than in the previous month.
But most PMIs are still below the 50 mark that divides contraction from growth, supporting action by the region's central banks to ease monetary policy further.
In the Czech Republic, the January PMI rose more than expected to 48.3 from December's more than three-year low of 46.0. In Poland, the index edged up to 48.6 from December's 48.5.
Hungary, which uses a different index, reported a jump to 55.9, helped by car factories raising output.
"The very open economies are still being weighed down by the euro zone, and the improvement we have seen in German data has not yet fully fed into improvement in central Europe," said Neil Shearing, chief emerging markets economist at Capital Economics.
"In general ... the slowdown at the end of the last year has been bottoming out. But for central Europe there is not much sign of any dramatic turnaround."
German manufacturing contracted very slightly in January but output and new business grew, its PMI showed.
The Polish central bank is expected to shave off another 25 basis points from its main interest rate next Wednesday after weak economic data including the biggest drop in retail sales in 8 years. It has already cut by 75 basis points to 4.0 percent.
Poland reported growth slowing to 2.0 percent in 2012, which implies a sharp drop in consumption in the fourth quarter.
"Poland needs a bit more policy support. In the Czech Republic ... I suspect the threshold to do more is a bit higher, this might prompt them to pause," said Shearing.
The Czech central bank has run out of standard policy tools, having slashed its repo rate to 0.05 percent.
It has said further easing would come through interventions to weaken the crown currency, but that may not be needed if the crown stays weak anyway and data signal scope for a pick-up. The bank's board next meets next Wednesday, the same day as Polish policymakers.
"The pessimism from the end of the last year has waned ... However, the indicator remains below the 50 mark, which shows recession is spilling over into this year," said David Marek, chief economist at Patria Finance.
"The Czech PMI has improved in a similar way as the German and Austrian (readings). This highlights how strongly we are dependent on the (euro zone) region."
Hungary's manufacturing PMI index was the outlier, jumping to show growth. Analysts put that down to one-off factors, adding that the Hungarian index was particularly volatile.
Zoltan Arokszallasi of Erste Bank said Hungary's economy probably shrank significantly in the last 3 months of 2012, "but in the first quarter we will likely see growth in quarterly terms."