WRAPUP 2-US July factory orders strong, Aug auto sales off

* Factory orders rose more than expected in July

* GM, Ford announce double-digit sales slumps in August

* Stocks rise, Treasury prices gain, dollar surges (Recasts, updates markets, adds auto sales)

By Mark Felsenthal

WASHINGTON, Sept 3 (Reuters) - New orders at U.S. factories jumped more than expected in July, a government report showed on Wednesday, but U.S. automakers reported dismal sales in August, raising fears of renewed economic headwinds.

Factory orders rose 1.3 percent after an upwardly revised 2.1 percent gain in June, the Commerce Department said.

Economists polled by Reuters were expecting a 1 percent gain. Factory orders have risen for five months in a row.

"It fills in the picture of a moderately recovering U.S. economy," said Joseph Trevisani, chief market analyst at FX Solutions in Saddle River, New Jersey.

General Motors and Ford posted double-digit U.S. sales declines, however, as uncertain economic conditions undercut buying incentives offered by automakers. GM's August sales tumbled 20.4 percent while Ford's fell 26.6 percent, forcing them to announce production cuts in the second half of the year.

Adding to a picture of sluggish economic activity, the Federal Reserve's anecdotal Beige Book survey of conditions said consumer spending was slowing and exports, long a bright spot, were showing some signs of fading.

"With generally unfavorable news on both the growth and inflation fronts, the information in this report does not suggest the Fed will change the funds rate," said Lehman Brothers economist Michael Hanson in a note to clients.

The Fed has held benchmark U.S. interest rates steady at 2 percent since April to help the economy move beyond a deep housing slump and tight credit.

Stocks see-sawed in and out of positive territory as evidence of anemic growth in the world economy stirred worry about the outlook for consumer spending and corporate profits in months ahead. The blue-chip Dow Jones industrial average ended the day slightly higher but the S&P and Nasdaq slipped.

Treasury debt prices rose, pushing benchmark U.S. Treasury yields down to four-month lows as weaker oil prices eased bond investors' inflation expectations. Oil prices fell to around $109 a barrel on Wednesday, well down from record highs of over $147 a barrel hit in early July.

The dollar surged to its highest against the euro since January on reports of weakening growth in the euro zone.

LABOR MARKET CHALLENGES

New evidence of the impact on the economy of the housing slump and the credit crunch came in a report showing persistent labor market softness. Layoffs by U.S. firms in August fell from July but were still much higher than a year ago, a report on Wednesday showed.

Downsizing at U.S. companies last month totaled 88,736 jobs, 14 percent below June but 12 percent higher than August 2007, employment consulting firm Challenger, Gray & Christmas Inc said.

"We have not seen this level of summer job cutting since 2002, when the country was still struggling to recover in the wake of the 2001 recession and September 11 (attacks)," said John Challenger, chief executive officer of Challenger, Gray & Christmas, in a statement.

The government is set to release its employment report on Friday. Analysts are expecting payrolls to fall for the eighth straight month.

Moderating mortgage interest rates brought a glimmer of hope for long-slumping U.S. housing markets.

Applications for U.S. home mortgages rose last week as rates for home loans eased from recent highs, according to data from an industry group.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity climbed 7.5 percent to 453.1 last week. It was the highest since mid-July.

In its report on factory orders, the Commerce Department said transportation orders jumped 3.2 percent in July after a 1.8 percent drop in June. When transportation orders were stripped out, factory orders still rose 1 percent, reflecting gains in orders for metals, machinery and nondurable goods.

Inventories rose for the 10th time in 11 months but the inventory-to-shipments ratio dipped to 1.20 months' supply from 1.22, the lowest since July 2007, the report said. (Additional reporting by Al Yoon, Richard Leong and Nick Olivari in New York and Poornima Gupta in Detroit; Editing by James Dalgleish)