With the main index above 50 for three straight months, the survey indicates that China's vast factory sector is expanding. The official PMI was released a day after a similar survey by HSBC suggested manufacturing activity at its strongest since May 2011.

Together the surveys support a growing consensus that economic activity in China revved up during October to December, after GDP growth had slowed for seven consecutive quarters to 7.4 percent in the third quarter. That provides a welcome sign for a global economy where both the euro area and Japan are in recession and the United States is struggling for significant growth.

"Output has stayed above the 50-mark, showing that the manufacturing industry appears to maintain growth expectations, but the rate of growth has weakened," the National Bureau of Statistics, which released the data, said in a note.

The official PMI reading was slightly below expectations in a poll of economists by Reuters last week that predicted a rise in the PMI to 51.0.

The survey showed output in oil processing, quarrying and tobacco industries slipped while food processing, auto manufacturing, textiles, steel and electronics all expanded, the bureau said.

A new export orders sub-index fell to 50 from 50.2 in November. A PMI reading below 50 suggests growth slowed, while a number above 50 indicates accelerating growth.

HSBC said its China PMI, which gathers more data from smaller, privately held firms with a strong export focus, rose in December to 51.5, its highest since May 2011.

The HSBC survey showed strong output despite a retreat in a sub-index tracking new export orders. China's export sector, a major source of growth for the economy, must combat slowing demand in its biggest markets and rising wages and costs at home.

China's official PMI generally paints a rosier picture of the factory sector than the HSBC PMI because it focuses on big, state-owned firms. The HSBC PMI targets smaller, private firms. There are also differing approaches to seasonal adjustment between the two surveys.

INVESTMENT

Some analysts caution that the pickup in economic activity in recent months may reflect renewed investment spending, rather than the consumer activity that policymakers acknowledge is needed to rebalance the economy.

"It's pretty clear that it's more driven by infrastructure and increasingly housing, that's driving heavy industry," said Zhang Zhiwei of Nomura International, speaking on Monday.

Rising land prices have prompted widespread expectations that the real estate market will be revived by an investment-driven recovery that would offset weak export markets, even though the central government had pledged to maintain investment and purchasing restrictions to try to control prices.

Railway spending delayed from earlier in 2012 was being rushed out before the end of the year, and rising prices for land purchased by state-owned developers could point to a relaxation in property market curbs that has yet to be made official, Zhang argued.

Steel futures recently hit a five-month high, after a dismal year in which lackluster demand contributed to overcapacity at debt-ridden mills and traders.

China was expected to achieve economic growth of 7.7 percent in 2012, forecasts in a benchmark Reuters poll show. That would mark the slowest full-year expansion since 1999.

While that is way above the world's other major economies, it is below the roughly 10 percent annual growth in China seen for most of the last 30 years.

The government has relied on fine-tuning its policy settings to try to combat the worst downturn China has faced since the 2008-2009 global financial crisis, studiously avoiding any hint of repeating a 4 trillion yuan ($640 billion) stimulus package it launched back then, which led to a debt-fuelled spending binge by local governments.

Measures to boost growth included reducing bank reserve levels and interest rates. More lately, they included injecting liquidity into the financial system through money market operations and accelerating approval of infrastructure projects.

The head of the influential Development Research Centre called for appropriate base money growth in 2013, including more cuts in banks' reserve requirement ratios (RRR), and a wider floating range for the yuan to make it more flexible, in comments published on Monday.

The central bank reiterated on Monday that China would stick with a prudent monetary policy in 2013, the latest sign that Beijing will not change policy direction when the new government takes over this year.

(Reporting by Lucy Hornby: Editing by Neil Fullick)

• A Permanent Economic Emergency