GLOBAL ECONOMY-Manufacturing shrinks across developed world

(adds U.S. data, analyst quote)

* US ISM manufacturing index lowest since Oct 2001

* Euro zone factory activity weakest since December 2001, production weakest since month after 9/11 attacks

* UK factory PMI weakest in near-17-year survey history

* Japan Tankan index for big manufacturers turns negative

* China gets boost as factories gear up after Olympics

By Burton Frierson and Ross Finley

NEW YORK/LONDON, Oct 1 (Reuters) - Manufacturing industry in the developed world contracted in September as global financial turmoil hurt businesses and all the signs pointed to more economic weakness ahead.

Factory activity in the euro area showed the fourth straight month of contraction in September, with output at its weakest since straight after the Sept. 11, 2001 terror attacks seven years ago, a survey of firms by Markit showed on Wednesday.

Similarly, U.S. factory activity shrank in September to its lowest since the 2001 recession, as the credit crisis tightened its grip on the world's largest economy. For details see [ID:nN01504188]

The U.S. report painted a comprehensive picture of weakness, with employment and new orders falling significantly. Meanwhile markets nervously awaited signs Congress would rescue the financial sector and get it back to lending to companies. [ID:nL1119662]

"With this slowdown going on, you add the inability to fund your business in the short run. That puts all the more pressure on Washington to get something done for the banking system," said Gail Dudack, chief investment strategist at Dudack Research Group in New York.

"It's really all about confidence, because without that, things can unravel quickly, and that's what happening in the global financial sector."

The ISM report followed data showing U.S. private-sector employers cut 8,000 jobs in September, a decrease that took place even without including the renewed financial chaos of the past few weeks.

Another report showed planned layoffs at U.S. companies rose 7.2 percent from a month earlier in September but jumped 33 percent compared with the same month a year ago, all of which bodes ill for Friday's comprehensive monthly payrolls data by the government.

With a report also showing the euro zone jobless rate rose to 7.5 percent in August, analysts said the 15-member bloc was sliding towards recession and the European Central Bank would turn its focus away from inflation and cut interest rates soon.