updated 12/21/2006 1:11:20 PM ET 2006-12-21T18:11:20

Factory activity in the Mid-Atlantic region fell in December after a modest gain the previous month, raising concerns about a slowing economy partly due to weakness in the manufacturing sector.

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The Philadelphia Federal Reserve Bank said its business activity index fell to -4.3 in December from 5.1 in November. Wall Street analysts had forecast a gain of 4.0.

The index was negative for a third time in the past four months. A reading below zero indicates contraction in the region’s manufacturing sector.

U.S. share prices and the dollar briefly dipped on the data, while Treasury prices rose a bit.

“It’s a negative surprise. A negative reading indicates contraction, so while specific things may be going on in the Philadelphia area, this would clearly be a negative,” said Sam Rahman, a portfolio manager at Baring Asset Management in Boston.

The outlook was also less optimistic. The new orders index, a gauge of future growth, was at -2.4 in December from -3.7 in November.

The six-month business outlook slipped to 6.7 in December, the lowest reading in three months. It was 12.4 in November.

But some economists played down the weak readings and said the economy was reasonably healthy.

“The Philly Fed index was weaker than expected, but not massively so,” said Pierre Ellis, senior economist at Decision Economics in New York.

“The question is the significance for the outlook and in that respect it’s important to look at the components and what stands out is the strength of employment, which is a sign of ongoing confidence.”

The future employment index rose to 17.7 in December from 13.2 in November.

The survey covers factory activity in a region encompassing eastern Pennsylvania, southern New Jersey and Delaware and is looked at closely as one of the first indicators of the health of the U.S. manufacturing sector.

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