The pick-up in the PMI to 53.3 from 53.1 in March indicated a further expansion in the vast factory sector, although it was slightly below market expectations of 53.6. Readings above 50 signal expansion while those below 50 point to contraction.

The manufacturing output sub-index rose to 57.2 from 55.2 in March. However, the National Bureau of Statistics noted many important industries remained weak with index readings below 50, among them chemicals, equipment, autos and oil refining.

The improvement in manufacturing likely reflected restocking after a slow winter, said Ting Lu, an economist at Bank of America-Merrill Lynch.

He said infrastructure investment was recovering as the dust settled from a corruption scandal in the Ministry of Railroads and from bureaucratic reshuffling at the local government level.

Although new export orders edged up to 52.2 from 51.9 in March, the sub-index for all new orders slipped to 54.5 from 55.1, implying that domestic new orders remained weak.

SMALL FIRMS SQUEEZED

The PMI boosted Australian shares, but did little to move other markets where investors are concerned about a sluggish U.S. economy and the bubbling euro area debt crisis. Indeed, many markets, including those in China, are closed on Monday to mark public holidays.

Australian shares .AXJO extended gains on the day to 0.5 percent after the PMI. The market had been up 0.2 percent before the figures were released.

Tight credit, especially for real estate developers and private firms, had helped push the Chinese economy to its weakest footing since the fall of 2008. But there are signs that the availability of loans is improving.

New loans in April may have reached 900 billion yuan ($140 billion), the Caijing Magazine said this weekend, citing a recent report by China International Capital Corp, or CICC. More attractive interest rates led to an acceleration in new mortgages, it added.

"Policymakers continue to grapple with the challenge of loosening enough to prevent a sharp slowdown, but not loosening too much and sparking an inflationary spiral," said Alastair Thornton, analyst at IHS Global Insight.

China's annual growth slowed to 8.1 percent in the first quarter of 2012 from 8.9 percent in the previous three months -- the fifth consecutive quarter of slowdown in the world's second-largest economy.

While large-scale manufacturers continue to report growth, small firms remain in contraction, the statistics bureau said. The tight credit conditions have disproportionately hit smaller and private companies, as reflected in a survey of smaller factories by HSBC.

The HSBC Flash PMI, the earliest indicator of China's industrial activity, showed a stabilizing economy last week. That index's reading of 49.1 for April came in below 50 for the sixth month in a row, reflecting a contraction in the factory sector, however the rate of deterioration slowed in a sign the economy may have bottomed out in the first quarter.

HSBC is due to release its final reading for April on Wednesday.

"Economic activity has started to recover but at a relatively slow pace," Capital Economics' analyst Qinwei Wang said in a note before the official data, citing an index of data the firm tracks.

(Editing by John Mair)

• A Permanent Economic Emergency