* Euro zone manufacturing shrinks, outlook dims * China's factory output grows at fastest pace in 9 mths * Coming up: API oil stocks data at 2030 GMT (Updates throughout, previous SINGAPORE) By Peg Mackey LONDON, July 24 (Reuters) - Oil rose above $103 a barrel on Tuesday after China's economy showed signs of improvement, but gains were checked by further evidence of damage to Europe's economy. China's manufacturing output in July grew at its fastest pace in nine months, helping lift an index of activity in the country's factory sector to its highest level since February and suggesting pro-growth government policies are having an impact. "China is the biggest driver of oil demand and its overall oil appetite does not seem to have suffered so much, as it builds up infrastructure and crude stockpiles," said Tony Nunan, a Tokyo-based risk manager at Mitsubishi Corp. Brent crude had climbed $1.22 to $104.26 a barrel in earlier trade, but by 0930 GMT was trading at $103.77 - a rise of 51 cents. U.S. crude gained 36 cents to trade at $88.50. Brent fell more than 3 percent on Monday after Spain's central bank said the euro zone's fourth-largest economy sank deeper into recession in the second quarter, stoking fears the country was headed for a bailout. And the likelihood of the euro zone tipping back into recession grew after the bloc's private sector shrank for a sixth month in July as manufacturing output plunged. "The euro zone crisis will take months or years to find a solution ... unfortunately there's no quick fix as there are many moving parts," said Nunan. Even Germany, Europe's largest economy, is feeling the chill from the debt crisis. Its private sector shrank for a third straight month in July, suggesting the economy may contract in the third quarter after an expected fall in the second. Further clouding investor sentiment, Moody's Investors Service changed its outlook for Germany, the Netherlands and Luxembourg to negative from stable and cited an increased chance that Greece could leave the euro zone. MIDDLE EAST UNCERTAINTY Oil found some support from supply worries triggered by turmoil in Syria and tension between Iran and the West over Tehran's nuclear programme. As international pressure continues on President Bashar al-Assad's government, Syria acknowledged on Monday that it had chemical and biological weapons and said it could use them if foreign countries intervened in its civil war. "The risks of escalation of the conflict in Syria, we think, will continue to limit the extent of any bearish sentiment," ANZ analysts said in a note on Tuesday. Moderating recent threats from Iranian officials about shutting a vital oil shipping lane, a military commander was quoted on Monday as saying Iran would not close the Strait of Hormuz as long as it was able to use the lane itself. Also on the supply front, U.S. crude oil stockpiles are forecast to have remained unchanged over the last week as a drop in imports was offset by lower refinery run rates, a preliminary Reuters poll showed on Monday. (Additional reporting by Jessica Jaganathan in Singapore; editing by James Jukwey)

Source