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Dec 29 (Reuters) - Activity in Russia's manufacturing sector expanded at its fastest pace in almost seven years in December, a business survey showed on Friday, though new export orders contracted for the second month running.

The S&P Global Purchasing Managers' Index (PMI) for manufacturing rose to 54.6 in December from 53.8 in November, moving further above the 50 mark that separates expansion from contraction. It was the highest reading since January 2017.

Output rose at its fastest pace in seven months and new orders also increased sharply again.

"Greater client demand was largely focused on the domestic market, however, as new export orders fell for the second month running," S&P Global said in a statement.

"Fewer customer requests from clients in key export markets led to the fastest fall in new business from abroad since July."

Moscow is spending heavily on manufacturing, pouring cash into the defence sector to ramp up military production following its February 2022 invasion of Ukraine. The sector's growth in the almost two years since then has been largely predicated on domestic demand.

Manufacturers are still grappling with logistical upheavals due to Western sanctions and the high cost of imported goods, hampered by the weak rouble and high inflation. The survey showed the rate of inflation was softening, S&P Global said.

Despite labour shortages in Russia, with unemployment at a record low 2.9%, firms increased staffing numbers to try to reduce backlogs of work, S&P Global said, though companies remained optimistic about the future.

"Confidence stemmed from planned investment in new products and machinery," S&P Global said. "The level of positive sentiment was historically elevated despite dropping to a three-month low."