* German industrial output bounces back strongly
* Japanese May machinery orders dive 3 percent to new low
* G8 to warn it is too early to withdraw stimulus
* Nikkei hits six-week low, European markets down
* Britain to tighten up bank regulation
(For more on the financial crisis, click on)
By Sarah Marsh and Darren Ennis
BERLIN/L'AQUILA, Italy, July 8 (Reuters) - German industrial output bounced back strongly in May, boosting hopes that the recession is bottoming out, even though a summit of G8 leaders fretted about the slow pace of global economic recovery.
Britain announced reforms to plug regulatory gaps in financial markets highlighted by the credit crunch which sparked the global recession, while a senior European Central Bank official warned that credit shortages could hobble the recovery.
German output rose 3.7 percent, far outstripping analysts' forecasts of a 0.5 percent rise and, coupled with the previous day's strong data on industrial orders, suggested the recession in Europe's biggest economy was bottoming out.
The euro initially turned positive and hit a session high versus the dollar on the data, though it later steadied and analysts urged caution.
"It is far too early to declare the return of Germany's growth engine," said Carsten Brzeski, an economist at ING Financial Markets. "The last two days were good news for the future stabilisation of the German economy. For a sustainable recovery, however, much more of the same will be needed."
That chimed with the view of the Group of Eight industrial nations whose leaders, meeting in Italy, were expected to agree at their annual meeting that the world economy was still too weak to remove stimulus measures, European officials said.
Record U.S. delinquencies on credit-card debt and home equity loans, plus an unexpected drop in Japanese machinery orders to a record low in May, lent weight to their argument and boded ill for business investment in the world's No. 2 economy, a major exporter.
Rounds of interest rate cuts and trillions of dollars in public funds have helped to prevent the deepest global recession in decades from turning into a depression, and financial markets seized on signs that the worst of the crisis was over.
However, doubts that consumers and private businesses will be ready to ramp up spending soon prompted warnings that governments would risk killing the recovery if they removed the life-line too quickly.
STOCKS DOWN
On the eve of the summit, British Prime Minister Gordon Brown told Reuters that the world had to wake up to the scale of the downturn and stay focused on restarting growth, although Canada said existing measures must be implemented before any talk of further action.
"I am not complacent and remain vigilant about the financial state of the world," said Brown.
Talk that the $787 billion U.S. stimulus package may have to be topped up has added to uncertainty about the global upturn. Investors have unwound recovery bets and put their money in places they feel are safer, such as the dollar and government bonds.
European stock markets were down. The FTSEurofirst 300 was 0.57 percent lower at 1214 GMT for a fifth losing session in a row. Asian stocks tracked Wall Street's sharp Tuesday losses with Japan's Nikkei average sliding 2.4 percent to a six-week low on Wednesday.
Encouraging data in recent weeks has been tempered by persistent signs of economic weakness, with China and Japan on Wednesday offering contrasting fortunes.
Chinese banks in June extended 1.53 trillion yuan ($223.9 billion) in loans as the government seeks to hit an eight percent growth target this year.
In Japan, the value of its core private-sector machinery orders, a leading indicator of capital spending, slumped three percent in May to a record low, defying expectations of a rise. And company bankruptcies jumped by more than 18 percent in June and were up 7.4 percent from a year earlier.
The euro zone economy contracted a record 2.5 percent in the first three months of 2009, although depleted stockpiles in the 16-nation area raised hopes of a better second quarter.
Nevertheless, ECB Executive Board member Lorenzo Bini Smaghi told Italy's Il Messaggero newspaper that there were risks to forecasts of a euro zone recovery throughout 2010.
"There is the risk of arriving at the appointed time with a banking system that is not able to support demand for financing," he said. "This represents a problem because without that financing the provision of loans to the real economy risks being blocked, worsening the crisis," he was quoted as saying.
Britain said it will tighten up how it supervises banks, scrutinise bonuses paid to their employees and punish misconduct more severely to try to prevent a re-run of the credit crunch.
The changes largely apply initiatives already underway at European Union and global level to improve supervision of system-wide risks and force banks to hold more capital to avert the need for future government bailouts.
MORE SPENDING?
Much of the stimulus money pledged by governments around the world has yet to feed into the economy, but fears that steadily rising unemployment may strangle any nascent recovery have prompted calls for even more spending.
Robert Nabors, a senior member of President Barack Obama's budget office, was to tell Congress on Wednesday that while the stimulus plan enacted in February was slowing "the economic freefall", Washington was ready to do more to save jobs.
The prospect of another stimulus was also raised by U.S. House of Representatives Majority Leader Steny Hoyer and one of Obama's economic advisers. (Reporting by Reuters correspondents around the world; Writing by Jon Boyle; Editing by David Stamp)