* Euro drops to lowest in almost a year against dollar * China's manufacturing activity may contract again in December * Italian bond yields fall from record at auction By Susan Thomas LONDON, Dec 29 (Reuters) - Copper fell on Thursday, for the second straight day, on a firmer dollar and investor caution over the euro zone sovereign debt crisis and worries about growth in big metals consumer China. Copper has fallen 23 percent this year, after a 30 percent gain in 2010 and a 140 percent jump in 2009, as the euro zone debt crisis slowed credit and prompted investors to switch to safer assets including the U.S. dollar. "The news that continues to move the market is the EU debt crisis," said Credit Suisse analyst Tobias Merath. "The liquidity story is affecting base metals more than other assets," he added, pointing to the flight out of assets perceived as risky and the effect the economic slowdown is having on base metals which are widely used in industry. Loans to private sector firms in the euro zone fell in November, European Central Bank (ECB) data showed on Thursday. The drop in funding to companies increased fears that the region faces a looming credit crunch, an issue of growing concern for the ECB as the worsening sovereign crisis makes firms and households increasingly wary about taking on debt, weighing on the economic outlook. Three-month copper on the London Metal Exchange fell 1.1 percent to $7,383 a tonne by 1048 GMT, extending a loss of 2.4 percent from the previous session. Volume was a slim 3,495 lots by late morning ahead of the year-end holiday weekend, compared with the 50-day moving average of around 20,000 lots. Worries about the impact of the euro zone problems on copper demand were compounded by evidence of slowing growth in China, the world's top consumer of the metal. China's manufacturing activity may contract again in December, a poll of economists showed ahead of the official purchasing managers index release on Jan. 1, suggesting the world's second-largest economy is finishing 2011 on a weak note amid the global malaise. Italian bond yields fell from recent record highs at auction on Thursday but cautious investors still demanded a near 7 percent yield to buy 10-year paper, a level seen unsustainable over time for the euro zone third-largest economy. "Today's decline in the auction yield by 'just' about 60 basis points versus end-November in such a high-yield territory underscores that the genuine pressure on Italy is still tremendous, despite bold ECB actions that has given the short ends a big boost," said David Schnautz, rate strategist at Commerzbank in London. Analysts also doubt whether domestic progress on reform would be enough to see Italy smoothly over its refinancing hurdles from January to April. The dollar strengthened against a basket of currencies as the euro slid to a 10-year low against the yen and the lowest in nearly a year versus the dollar on Thursday. Gains in the dollar can pressure dollar-denominated commodities by making them more expensive for consumers using other currencies. "We still think the market will suffer from lack of interest drift over the next few days and that year end will see more selling pressure if anything as concerns remain about Europe and a slowdown in China," RBC Base Metals said in a note to clients. Three-month aluminium was down 0.8 percent at $1,984.75, after falling to the lowest since July last year. It closed at $1,999 on Wednesday. Western world unwrought aluminium stocks rose to 1.456 million tonnes in November compared with a revised 1.406 million in October, industry data showed on Wednesday, signalling retreating demand for the metal. Tin, which has fallen around 44 percent since a record $33,600 hit in April, rose to $18,900 from $18,600 . Zinc was $1,812 from $1,810.5 , lead was $1,959 from $1,960 and nickel was $17,775 from $17,900. Metal Prices at 1049 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 335.10 -1.30 -0.39 444.70 -24.65 LME Alum 1982.00 -17.00 -0.85 2470.00 -19.76 LME Cu 7377.25 -87.75 -1.18 9600.00 -23.15 LME Lead 1957.00 -3.00 -0.15 2550.00 -23.25 LME Nickel 17761.00 -744.00 -4.02 24750.00 -28.24 LME Tin 18775.00 175.00 +0.94 26900.00 -30.20 LME Zinc 1813.50 3.00 +0.17 2454.00 -26.10 SHFE Alu 15855.00 -60.00 -0.38 16840.00 -5.85 SHFE Cu* 54220.00 -950.00 -1.72 71850.00 -24.54 SHFE Zin 14575.00 -180.00 -1.22 19475.00 -25.16 ** 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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