Better US data and weaker dollar lift copper

* Fund buying returns on buoyant US macroeconomic data

* Copper, aluminium inventories fall but remain high

(Recasts, updates prices, market activity to close of U.S. session; adds NEW YORK to dateline)

By Barani Krishnan and Michael Taylor

NEW YORK/LONDON, Feb 2 - Copper settled a touch higher on Tuesday as good economic data and a weaker dollar helped usher investor confidence back into commodities, taking the metal up 1 percent before profit-taking pared gains.

U.S. copper futures most actively traded March <HGH0> settled up 0.2 percent at $3.0895 a lb in New York. The session peak was $3.1245, up 1.3 percent.

On the London Metal Exchange, benchmark copper for three-month delivery <MCU3> closed up 0.4 percent at $6,820 a tonne, up from a session low of $6,727.

Traders reported fund buying in copper on both the New York and London exchanges as investors, emboldened by bullish U.S. macroeconomic data this week, returned to commodity markets, which had sold off sharply in recent weeks.

"We're having some more encouraging economic data coming through," said Gayle Berry, analyst at Barclays Capital in London.

"The pieces of the jigsaw do seem to be falling into place to suggest that we will see a recovery in demand begin to pick up pace over the first half of this year," Berry said.

And the short-selling pressure that pushed copper to 2-1/2 month lows this week could disappear if investors sensed a broader-based rebound around the corner, analysts said.

"I think all of these commodities have just been selling off so much that any of sort of bullish news that comes up from here is just going to get the shorts caught with their pants down," said Michael K. Smith, president of T & K Futures and Options Inc in Port St. Lucie, Florida.

The demand outlook for copper improved after the release of better-than-expected U.S. manufacturing data on Monday, which followed with similarly positive U.S. GDP data on Friday. [ID:nN01363414] [ID:nN28120005]

The dollar's decline since Monday, after rallying to 6-1/2 month highs against the euro, was another factor helping commodities. A weaker dollar is favorable to investors using other currencies to buy dollar-denominated commodities. [USD/]

Copper prices fell 8.5 percent last month as rising LME inventories indicated weak demand outside of China, the world's largest metals consumer.

Copper stockpiles in LME warehouses are at six-year highs, although they fell on Monday by 2,375 tonnes -- the largest decline since early July -- to stand at 541,150 tonnes.

Prices had also fallen recently on concerns over monetary tightening in China that could potentially erode demand. [ID:nTOE61003S]

But some analysts said the market has overreacted to the concerns on China, the No. 1 consumer for copper.

"People worry it means growth will slow down," said Standard Chartered analyst Daniel Smith, referring to the credit-tightening measures that had surfaced in China's financial system since mid-January.

"But we've still got loose monetary conditions in China that are conducive to growth. The fact it is becoming tighter is not the same as it being a tight monetary policy."

Other LME metals rose as well.

LME aluminium <MAL3> closed at $2,120 from $2,085. Stocks of the metal, used in transport and packaging, fell 3,125 tonnes, but held near record levels above 4.6 million tonnes.

A large portion of those aluminium stocks are tied up in finance deals, to release cash for producers and to earn banks higher returns than they would get in money markets. [ID:nGEE5BA277]

Steel-making component nickel <MNI3> was at $18,300 from $18,000, while zinc <MZN3> was last quoted at $2,160/2,161 a tonne from $2,145.

Battery material lead <MPB3> was at $2,118 from $2,045, while tin <MSN3> was at $16,450 from $16,150.

Cancelled warrants of lead -- material earmarked for delivery from LME warehouses -- were last at 15,650 tonnes compared with 75 tonnes on Dec. 17.

For graphics on LME metal inventories, click on:

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