* LME-SHFE copper arbitrage at over 400 yuan * Dollar falls against basket of currencies * Coming up: U.S. PPI inflation yy, NSA, July; 1230 GMT By Silvia Antonioli LONDON, Aug 17(Reuters) - Copper rose on Wednesday on buying interest from Asia and arbitrage trading, but gains were limited as fears of a slower economic recovery, which may dent metals demand growth, dampened market sentiment. Benchmark copper on the London Metal Exchange was up 0.5 percent at $8,878 a tonne by 0945 GMT from $8,830 on Tuesday, when it hit its lowest in a week at $8,751. The metal used in power and construction has fallen around 13 percent from the record high $10,190 a tonne it hit on Feb. 15. "There are pockets of physical buying but it's price based...it's not full restocking," said Steve Hardcastle, head of metals trading at Sucden Financial. "There is a certain amount of short-covering taking place in Shanghai and the arbitrage window has been there, or there abouts, for the last two days: LME buying, Shanghai selling." The LME benchmark contract was trading at a discount to the Shanghai Futures Exchange most active contract and this prompted more buying from Asia. If the arbitrage, which opened earlier this month, holds at current levels of around 400 yuan it could encourage increased refined copper imports into China in the next few months, traders have said. "Chinese copper prices are outperforming LME prices, which would incentivise Chinese consumers to step up imports," Credit Suisse said in a note. "Based on our view that the economy should recover moving along H2 2011, we think the current price weakness across metals offers entry opportunities." China accounts for nearly 40 percent of total copper demand, and the market has been anxiously waiting for it to start buying again after a lengthy period of destocking. A softer dollar also supported industrial metals. A weak U.S. currency makes dollar-priced commodities more affordable for holders of other currencies. WEAKER GROWTH But problems in the Western world kept base metals subdued. Data in the last few days, including weak German and Euro zone growth, pointed to a weaker-than-previously-expected economic recovery, raising concerns over metals demand growth. The sovereign debt crisis in Europe has also prompted investors to switch from commodities perceived as risky, including industrial metals, to safe havens such as gold. On a more positive note, data on Tuesday showed that U.S. industrial output rose in July at its fastest pace in seven months. "The (metals) market is undecided but it is likely that growth will slow down in the second part of the year...it is yet to be seen whether this is already priced in," said Eugen Weinberg, commodities analyst at Commerzbank. The outcome of a meeting between Nicolas Sarkozy and the Angela Merkel put the European and U.S. equity markets under pressure but had little impact on metals, analysts said. The leaders of France and Germany, under pressure to counter Europe's debt market crisis, have agreed to float proposals in September for a tax on financial transactions. "They (the proposals) were so general," said VTB Capital analyst Andrey Kryuchenkov. "We will need to look at the details of the proposal in September." Tin was at $24,400 from $24,150 while zinc , used to galvanize steel was at $2,192 from $2,181 at Tues day's close. Battery material lead was at $2,361 from $2,356 and aluminium was at $ 2,376.25 from $ 2,375 . Stainless steel material nickel was at $21,650 from $21,700. Metal Prices at 1029 GMT Comex copper in cents/lb, LME prices in $/T and SHFE prices in yuan/T Metal Last Change Pct Move End 2010 Ytd Pct move COMEX Cu 401.30 1.90 +0.48 444.70 -9.76 LME Alum 2375.00 0.00 +0.00 2470.00 -3.85 LME Cu 8830.00 0.00 +0.00 9600.00 -8.02 LME Lead 2356.00 0.00 +0.00 2550.00 -7.61 LME Nickel 21695.00 -5.00 -0.02 24750.00 -12.34 LME Tin 24150.00 0.00 +0.00 26900.00 -10.22 LME Zinc 2182.00 1.00 +0.05 2454.00 -11.08 SHFE Alu 17310.00 160.00 +0.93 16840.00 2.79 SHFE Cu* 66800.00 310.00 +0.47 71850.00 -7.03 SHFE Zin 16975.00 375.00 +2.26 19475.00 -12.84 ** Benchmark month for COMEX copper * 3rd contract month for SHFE AL, CU and ZN SHFE ZN began trading on 26/3/07

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