(Updates with closing prices)
By Peter Hobson
LONDON, July 25 (Reuters) - Nickel prices dived more than 3%on Thursday, its blistering rally unwinding as a sharp slowdownin euro zone factory activity undermined the outlook for metalsdemand.
Benchmark nickel on the London Metal Exchange (LME)ended 3.3% down at $14,075 a tonne.
The stainless steel ingredient hit $15,115, its highest in ayear, on July 18 after surging more than 20% in a little morethan two weeks.
The rally was driven largely by speculators and notjustified by fundamentals showing a largely balanced market,said Capital Economics analyst Ross Strachan.
"Nickel is returning to reality," he said, predicting pricesaround $11,000 by the end of the year. He said that over thelonger term, however, prices would rise as supply tightens.
CENTRAL BANKS: ECB President Mario Draghi said the eurozone's central bank was looking at interest rate cuts, freshbond buys and new policy guidance to lift persistently lowinflation.
The U.S. Federal Reserve, meanwhile, looks poised to cutU.S. rates next week.
Aggressive easing by the two central banks is designed tosupport economic growth, which should lift metals prices.
GERMANY/EURO ZONE: Underlining a slowdown in global factoryactivity that has pushed down metals prices, German businessmorale deteriorated more than expected in July, hitting itslowest since April 2013.
Recession is spreading across the German industrial sector,Ifo economist Klaus Wohlrabe said.
The German data added to a growing pile of numberssuggesting business growth is weakening across the euro zone,hurt by a deepening contraction in manufacturing.
TRADE WAR: Negotiators for China and the United States willmeet in Shanghai on Tuesday to continue talks to resolve a tradedispute that has roiled markets and damaged growth in China, thelargest metals consumer.
Nearly 70% of global nickel consumption, estimated at 2.4million tonnes this year, is by stainless steel mills, most ofwhich are in China.
NICKEL STOCKS: Headline nickel stocks in LME-approvedwarehouses, at about 145,000 tonnes, are the lowest since 2013.<MNISTX-TOTAL>
YUGUANG LEAD: Henan Yuguang Gold and Lead Co,China's top lead producer, is due to finish maintenance at alead smelter in Jiyuan, Henan province, on Thursday.
OTHER METALS: LME copper closed 0.1% up at $6,007 atonne, aluminium ended unchanged at $1,826, zincfell 0.8% to $2,440, lead was up 1.4% at $2,114.50 andtin slipped 0.4% to $17,850.
(Additional reporting by Mai Nguyen and Tom Daly; Editing byDale Hudson and David Goodman)