US RATE FUTURES-Point to 25 bps Fed cut on ISM surprise

(Adds details, analyst comments)

By Ros Krasny

CHICAGO, April 1 (Reuters) - Rate futures traders pared back bets on Tuesday of a large rate cut from the Federal Reserve this month following a higher-than-expected reading on the U.S. factory sector.

Short-term interest rate futures, which reflect market sentiment on Fed policy moves, are pricing in another 25 basis point cut in the federal funds rate at the April 29-30 Federal Open Market Committee policy meeting.

However, chances for a 50 basis point Fed ease fell to 30 percent from 52 percent on Monday.

The Institute for Supply Management said its factory activity index rose to 48.6 in March from 48.3 in February, above the median Wall Street forecast of 47.5.

That leaves the closely watched index below 50, suggesting contraction, for the third month out of the last four. But it cast some doubt on the severity of the downturn.

"While manufacturing is contracting, it is contracting only mildly, and very mildly for an economy that is regarded at or very close to recession," said Alan Ruskin, chief international strategist at RBS Greenwich Capital in Greenwich, Connecticut.

The report suggested strong exports whipped up by the weak U.S. dollar are cushioning the U.S. downturn. New export orders in March were at 56.5 against 56.0 in February.

"The data confirms that the weakness on the domestic side of the ledger is offsetting a still robust global economic expansion," said strategists at IDEAglobal in New York.

ISM's "prices paid" component spiked to 83.5 from 75.5 in February, a trend that could harden opposition to further aggressive rate cuts from inflation hawks at the Fed.

The Fed has lowered its benchmark lending rate to 2.25 percent from 5.25 percent since mid-September. Futures suggest that the low in the current cycle will be 1.75 percent.

The Fed "surely sees the sharp increase in headline prices continuing to bleed through to the core," said the IDEAglobal strategists. (Reporting by Ros Krasny; Editing by Tom Hals)