* British manufacturing sustains momentum through February
* Mortgage applications surge, highest since Nov 2007
* Sterling cuts losses vs dollar, gains vs euro
By Andy Bruce and Ana Nicolaci da Costa
LONDON, March 3 (Reuters) - British manufacturingstrengthened last month and mortgage approvals hit their highestlevel in January since November 2007, data showed on Monday,underlining the momentum behind the country's economic recovery.
Hiring in factories picked up at the fastest rate since May2011, according to a survey gauging manufacturing activity,while new orders continued to pile in.
The surprisingly swift economic revival has been drivenlargely by consumer spending and an upturn in Britain's housingmarket, which shows no signs of abating.
Figures from the Bank of England showed lenders approved76,947 mortgages in January, the most since near the start ofthe financial crisis, compared with 72,798 in December and morethan forecast by analysts.
But there was another fall in lending to businesses, even ifthe pace of decline slowed, in a reminder that the recovery hasyet to take hold fully in other areas of the economy.
The Bank of England has said exports and business investmentwill need to strengthen in 2014 for growth to last, whilefinance minister George Osborne has said he plans to help boostinvestment and exporters in his budget due on March 19.
"Today's CIPS manufacturing survey data for Februaryprovided further upbeat signs for the health of the UK economy,"said Andrew Goodwin, senior economic adviser to the EY ITEMClub.
"Admittedly, the latest BoE data on lending in Januarypoints to credit to firms continuing to fall. But the large cashpiles that many firms have built up should provide the resourcesto fund further growth in investment."
Sterling cut its losses against the dollar and rose againstthe euro after the data, while British government bonds trackedBunds higher on the day as the Ukraine crisis spurred investorsto seek safe haven assets.
ROBUST GROWTH
The Markit/CIPS Manufacturing Purchasing Managers' Index(PMI) ticked up to 56.9 from 56.6 in January, higher than the56.5 expected by economists in a Reuters poll. Readings above 50point to growth in activity.
That meant British manufacturing activity expanded fasterlast month than in all of its major European peers.
The employment subindex rose at its fastest pace since May2011, as companies came under strain to meet demand withexisting capacity. Manufacturing accounts for around a 10th ofBritain's economy.
"The survey suggests we should expect another quarter ofrobust economic growth in the first quarter," said Rob Dobson,senior economist at Markit, which compiles the survey.
Overall, the PMI suggested manufacturers were mostly unbowedby the floods that have submerged swathes of southwest England.A report from Fitch ratings agency on Monday also showedinsurers should find losses from the bad weather manageable.
Economists polled by Reuters expect the economy will growaround 0.6 percent from quarter to quarter this year, with houseprices set to rise strongly.
House prices rose in February in more regions of England andWales than at any time in nearly 10 years, a separate surveyshowed on Monday.
Despite January's surge in mortgage approvals, levels arestill short of levels of around 90,000 a month seen before the2008 financial crisis.
BoE Governor Mark Carney and other officials have playeddown suggestions that the housing market is overheating.
The central bank said that lending to non-financialbusinesses fell again in January, down 0.6 billion pounds aftera steeper fall of 1.7 billion pounds in December.
"With the UK sustaining a decent level of economic activityand prospects looking pretty bright, business demand for creditwill likely pick up appreciably over the coming months," saidHoward Archer, economist at IHS Global Insight.
The BoE also released usage statistics for its Funding forLending Scheme (FLS), introduced with the government in 2012 toboost lending to households and businesses.
Net lending by FLS participants was 5.8 billion pounds ($9.7billion) during the fourth quarter of 2013, down slightly froman upwardly revised 6.2 billion pounds in the third quarter.
Lloyds Banking Group topped the list of lendersunder the scheme, followed by Nationwide Building Society.
But Royal Bank of Scotland and Santander UK cut their net lending by 2.3 billion pounds and 1.4billion pounds, respectively, continuing the shrinkage in theirloan books that has seen them cut lending by a combined 23billion pounds since the last 18 months.