By Richard Hubbard
London (Reuters) - European shares extended gains on Tuesday when new data showed the region's factory activity no worse than originally estimated in March, while the euro slipped as investors worried about the impact of the Cyprus bailout.
The euro zone Manufacturing Purchasing Manager's Index (PMI), which points to future levels of factory activity, fell in March to 46.8 but was slightly better than a preliminary estimate of 46.6.
"Euro zone manufacturing ... looks likely to have acted as a drag on the economy in the first quarter, with an acceleration in the rate of decline in March raising the risk that the downturn may also intensify in the second quarter," said Chris Williamson, chief economist at index compiler Markit.
Although the index has extended its run below the 50 mark that separates growth and contraction for a 20th month, the lack of further bad news helped European equity markets push higher on the first trading day of the new quarter.
Europe's index of top shares, the FTSEurofirst 300, rose 0.6 percent in morning trade with Paris's CAC-40, Frankfurt's DAX and London's FTSE 100 rising between 0.6 and 0.7 percent.
However, gains in MSCI's world equity index were more subdued after weaker-than-expected manufacturing data from China and the United States on Monday.
Wall Street fell sharply in the wake of the U.S. figures, which were seen as hinting at a cooling economy, though stock index futures point to a small recovery when trading resumes on Tuesday.
The weak euro zone factory data added to worries about the implications of the Cyprus bailout and the uncertain outlook for Italy, without a government more than month after elections, to depress sentiment in the single currency.
The euro edged down 0.1 percent against a mostly steady dollar to trade around $1.2830, but remained well above last week's four-month low of $1.2750.
Cyprus detailed losses over the past weekend of around 60 percent for savers of more than 100,000 euros as part of a bailout agreed just over a week ago, the first euro zone rescue deal to make bank depositors share the burden.
But investors are cautious about making any major moves before a European Central Bank policy meeting on Thursday.
Interest rates are expected to be left on hold at the meeting though bank boss Mario Draghi could express concern about the euro zone's outlook at a subsequent news conference.
"As the fundamental outlook for the euro region turns increasingly bleak, the ECB remains poised to strike a dovish tone for monetary policy," said David Song, currency analyst at DailyFX.
Meanwhile temporary capital controls remain in place for Cyprus and, although the island's banks reopened in orderly fashion last week, markets are also wary that the precedent set by the bailout could spur deposit withdrawals from banks in Spain and Italy.
"The way the European Union managed the Cypriot crisis has been a disaster, and confidence might take time to come back, so investors will remain cautious for a while," said David Thebault, head of quantitative sales trading, at Global Equities.
In the fixed income market bonds issued by Spain and Italy, were broadly steady on Tuesday, although yields were expected to rise in the coming days, adding to a steady climb over the last two weeks.
Italian 10-year yields were down 1 basis point on the day at 4.73 percent while equivalent Spanish yields were down by the same amount at 5.05 percent.
Italian yields have risen 21 bps since March 22, due in part to its struggle to form a government after elections in February failed to produce a clear winner.
Italy's president acknowledged on Saturday that he had limited scope to force divided political parties to find a solution, but ruled out standing down early to make way for new parliamentary elections.
The dollar was down 0.15 percent against a basket of currencies after data on Monday showed slowing U.S. factory activity in March, pointing to an economy losing momentum as government spending cuts bite.
Oil and copper, both sensitive to industrial demand, fell as investors also focused on Monday's official Chinese factory activity report which, like the U.S. figures, was below forecasts.
U.S. crude futures fell 30 cents to $96.77 a barrel while Brent dropped below $111 a barrel to be around $11.78.
London copper fell 0.9 percent to $7,469 a tonne, after touching a seven-month low earlier.
"China's manufacturing data was a little bit of a disappointment and the U.S. data wasn't really rock solid either," said Singapore-based analyst Dominic Schnider of UBS. "That is causing a little bit of a headache, especially given we have sufficient supply."
Gold was steady at around $1,600 an ounce after it had rallied to a 1-month peak in March on worries about stability in Europe as politicians scrambled to clinch the Cyprus bailout.
(Additional reporting by Blaise Robinson and Jessica Mortimer. Editing by David Stamp)