* New Feb loans forecast at 920 bln yuan, vs 2.03 trln yuan in Jan
* Shadow banking ad mortgage lending activity falls in Feb
* Feb M2 rises 11.1 pct y/y, vs f'cast 11.4 pct
* Central bank has signalled move to gradual tightening (Adds analyst comments, details)
By Kevin Yao and Yawen Chen
BEIJING, March 9 (Reuters) - China's new loans fell sharply in February from near-record levels the previous month but were still higher than expected, highlighting the difficulties the government faces as it struggles to put rising debt under control.
Under its new "prudent and neutral" policy, the People's Bank of China (PBOC) has adopted a modest tightening bias in a bid to cool explosive growth in debt, though it is treading cautiously to avoid crimping economic growth - which Beijing has said will be lower this year.
The February money data released on Thursday contained encouraging signs, as shadow banking activity and mortgage lending shrank from the previous month.
And new loans from China's banks, at 1.17 trillion yuan ($69.32 billion), were far below January's 2.03 trillion yuan, the second highest ever.
But the February number was still above the 920 billion yuan analysts polled by Reuters predicted.
"Bank lending in China held up better than expected last month but at the expense of other forms of credit, which have become less attractive following the recent rise in market interest rates," said Julian Evans-Pritchard at Capital Economics.
He expected increases in funding costs for banks will encourage them to raise lending rates for new borrowers and that overall credit growth will therefore cool in coming quarters.
The world's second-largest economy had a lending binge in 2016. A record 12.65 trillion yuan of loans was extended as the government encouraged credit-fueled stimulus to meet its economic growth target of 6.5-7.0 percent. It was reached - growth was 6.7 percent - but the credit explosion fuelled worries about the country's debt mountain.
Premier Li Keqiang opened the annual session of parliament on Sunday vowing to erect a firewall against financial risks.
In February, China's total social financing (TSF), a broad measure of credit and liquidity in the economy, dropped to 1.15 trillion yuan from a record 3.74 trillion yuan in January.
A breakdown of the February total financing numbers showed a slide in bankers' acceptances and corporate bond issuance, suggesting banks are reducing their exposure to riskier shadow banking activities.
Household loans, mostly mortgages, accounted for 25.7 percent of new loans in February, down from 37 percent in January and 50 percent in 2016, adding to signs of cooling in the housing sector, central bank data showed
The PBOC raised short-term interest rates modestly in January and February and is expected to do so again in coming months, but is seen keeping its benchmark policy lending rate steady through at least mid-2018, according to a Reuters poll.
Outstanding yuan loans grew at 13 percent by month-end on an annual basis, higher than an expected 12.7 percent rise.
Chinese banks usually "front load" loans early in the year as they compete fiercely to maintain market share and to lock in higher-quality borrowers as soon as possible.
Broad M2 money supply (M2) in February grew 11.1 percent from a year earlier, central bank data showed on Thursday, missing forecasts for 11.4 percent growth.
China's foreign-exchange deposits were at $752.6 billion at the end of February, compared with $726.4 billion a month earlier, the central bank said.
For 2017, China has cut its target for broad money supply growth to around 12 percent from about 13 percent for 2016, according to the government work report made at Sunday's opening of the annual meeting of parliament.
The trimmed M2 target reinforces views that Beijing has shifted its stance to a modest tightening bias under "prudent and neutral" monetary policy, aiming to cool credit expansion.
China aims to expand its economy by around 6.5 percent this year pushes through painful reforms to address a rapid build-up in debt, and erects a "firewall" against financial risks.
At the end of 2016, China's debt-to-GDP ratio rose to 277 percent from 254 percent the previous year, with an increasing share of new credit being used to pay debt servicing costs, UBS analysts said in a recent note.
$1 = 6.9100 Chinese yuan Editing by Richard Borsuk