Demand continued to fall, according to the surveys which nevertheless demonstrated an uptick in optimism, suggesting the region may soon stage a wider recovery.

HCOB's final euro zone manufacturing Purchasing Managers' Index (PMI), compiled by S&P Global, dipped to 46.1 in March from February's 46.5, beating a preliminary estimate of 45.7 but staying below the 50 mark denoting growth in activity for a 21st month.

An index measuring output, which feeds into a composite PMI due on Thursday and is seen as a good gauge of economic health, rose from February's 46.6 to 47.1, improving on the flash estimate of 46.8.

"Today's PMI results are an indicator of the massive challenges European manufacturers are facing. Materials shortages have abated somewhat, but the outlook remains uncertain," said Goetz Erhardt at Accenture.

French manufacturing weakened at a steeper pace last month - although the contraction was not as severe as a preliminary estimate suggested - while in Germany, Europe's largest economy, the downturn in the sector which accounts for about a fifth of the country's GDP continued.

Defying the wider euro zone dip, Spanish factory activity expanded in March for a second month and Italy showed signs of recovery after 11 straight months of contraction, earlier figures showed.

Irish manufacturing contracted in March after briefly returning to growth a month earlier. Its PMI has sat below 50 for most of the last 17 months.

In Britain, outside the European Union, manufacturers reported their first overall growth in activity in 20 months thanks to recovering demand in their home market, according to its PMI that added to signs last year's shallow recession has ended.

New orders in the euro zone fell for a 23rd month despite factories cutting their prices at the fastest pace since November. Any sign of easing inflationary pressures will likely be welcome news to the European Central Bank as it attempts to bring inflation back to target.

Inflation fell in six economically important German states last month, preliminary data showed, suggesting national inflation will continue its downward trajectory.

ECB President Christine Lagarde told European Union leaders last month the euro zone's inflation rate was set to keep on falling while economic growth would start picking during the year.

Euro zone factories reduced headcount again but, in a sign managers expect future output to pick up, a gauge of optimism rose to 57.4 from 57.1, its highest since April last year.

(Reporting by Jonathan Cable; Editing by Hugh Lawson and Christina Fincher)

By Jonathan Cable