LONDON Manufacturing activity across the euro zone contracted in July at the fastest pace since COVID-19 was cementing its grip on the world as demand slumped despite factories cutting their prices sharply, a survey showed on Tuesday.

There was considerable weakness seen in Germany, Europe's largest economy, while France and Italy, the second- and third-largest euro zone economies, also recorded marked deteriorations since June.

HCOB's final euro zone manufacturing Purchasing Managers' Index (PMI), compiled by S&P Global, fell to 42.7 in July from June's 43.4, its lowest since May 2020 and matching a preliminary reading. A reading below 50 marks a contraction in activity.

An index measuring output, which feeds into a composite PMI due on Thursday and seen as a good gauge of economic health, dropped to 42.7 from 44.2, a low not seen in over three years.

"It looks like the manufacturing recession is here to stay in the euro zone," said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank.

"Stronger declines in output, new orders and purchase volumes at the start of the third quarter back up our view that the economy as a whole is in for a bumpy ride in the second half of the year."

Demand fell sharply even though sinking input costs - which fell at the fastest pace since mid-2009 due to increased competition among suppliers - allowed factories to slash their charges. The output prices index was down to a near 14-year low of 45.0 from 47.0.

"The European Central Bank will be pleased to see that deflation of output prices has picked up speed again, falling at the most rapid pace in almost 14 years. However, the worries about services inflation remain high on the agenda," de la Rubia said.

Last week, the ECB lifted interest rates for the ninth consecutive time but raised the possibility of a pause in September as inflation pressures show tentative signs of easing and recession worries mount.

(Reporting by Jonathan Cable; Editing by Susan Fenton)