Manufacturing shrinks slightly in August: ISM

NEW YORK (Reuters) - Factory activity unexpectedly shrank slightly in August while inflation pressures also eased, according to an industry report released on Tuesday.

The Institute for Supply Management said its index of national factory activity edged lower to 49.9 in August from July's 50.0, the level separating contraction from expansion.

Economists had expected an unchanged reading of 50.0, according to the median of their forecasts in a Reuters poll. The 82 forecasts ranged from 47.8 to 52.0.

The report suggests the factory sector is still struggling, along with the rest of the economy, to overcome the effects of the worst U.S. housing slump since the Great Depression of the 1930s.

"I was a little surprised that it was not a bit stronger. These numbers are part of the overall picture showing we are on the precipice of recession, not really in it," said Mark Vitner, economist at Wachovia Securities in Charlotte, North Carolina.

On Wall Street, stocks managed to hold on to the day's earlier gains. The dollar trimmed its gains versus the euro after the report. U.S. Treasury prices pared their earlier losses and were flat.

Officials at the Federal Reserve are likely to be relieved by the moderation in price pressures, which were reflected in a drop in the prices paid index.

The prices paid index fell to 77.0 in August from 88.5 in July. That was its lowest prices paid index since 75.5 in February this year and marked its biggest one-month drop since October 2006.

(Additional Reporting by Chris Reese, Editing by Chizu Nomiyama)