* Euro hovers near 2-month low vs dollar * Shares fall as euro zone data disappoints * Wall Street expected to fall as spending cuts loom * lacklustre China manufacturing data hits commodity markets By Marc Jones LONDON, March 1 (Reuters) - European shares fell sharply and the euro hit a two-month low on Friday, as weak economic data from Italy, France and Britain added to concerns about imminent U.S. spending cuts and political stalemate in Rome. Wall Street was also expected to open lower as investors waited for U.S. government budget cuts due to take effect at the end of the day, and for a flurry of new data that will help gauge the temperature of the world's biggest economy. New surveys from Europe hit investor confidence. They showed British manufacturing shrank unexpectedly in February, while France's factories suffered their 20th consecutive monthly fall in activity and industrial activity in Spain and Italy deteriorated again. It points to a largely poor start to the year for all the region's big economies barring Germany, which continues to grind out improvements. Its manufacturing sector grew for the first time in a year as export orders hit a 21-month high. Britain's Markit/CIPS Manufacturing PMI fell to 47.9 from a downwardly revised 50.5 in January, confounding forecasts of a rise to 51.0. It was the first reading below the 50 line that separates growth from contraction since November. European shares and the euro had been in positive territory ahead of the data but tumbled after the PMIs, which further dented hopes of a quick rebound in the 17-nation bloc's economy. "The concern is that manufacturing trends are diverging strongly within the euro zone," said Chris Williamson, chief economist at data collator Markit. "A revival in export orders and resilient domestic demand has helped propel Germany's growth so far this year, while deteriorating domestic demand is holding back the economies of France, Italy and Spain." After a brief spell of resistance, the euro dropped to a two-month low of $1.29855 versus the dollar just after midday. Its weakness was compounded by a buoyant dollar, which hit a six-month high versus a basket of major currencies. After a turbulent week, the pan-European FTSEurofirst also reacted badly to the data as it fell to a session low to leave it down 0.9 percent on the day despite a positive start. Italy's main FTSE MIB was leading the slide, down over 2 percent and 4 percent lower on the week, as figures showing the unemployment rate at a 21-year high added to concerns about the country's post-election political stalemate. ITALY CONCERN Investors are worried that political problems in Italy, the euro zone's third-largest economy, could reignite the bloc's crisis, now in its fourth year. Some economists have even questioned whether the European Central Bank's pledge to help struggling member states which ask for aid can be utilised if there is no workable government. Italian bonds came under more pressure after their worst week in six months. Yields - which rise as prices fall - rose again, to 4.8 percent on 10-year paper from 4.45 percent at the start of the week. "I'm not convinced there's going to be any huge turnaround in Italian politics so we'll continue to play negative outlook on risk," said one bond market trader who requested anonymity. U.S. SPENDING CUTS Also weighing on financial markets was the prospect of the gradual introduction of automatic U.S. spending cuts worth $85 billion after U.S. lawmakers failed to reach a compromise deal. President Barack Obama meets top leaders of Congress at the White House at 10 a.m. EST (1500 GMT) to explore ways to avoid the unprecedented cuts. With stock futures pointing to opening losses of around 0.6 percent, Wall Street didn't appear overly optimistic. The International Monetary Fund said on Thursday it would probably slice 0.5 percentage points off its 2 percent 2013 growth forecast for the world's biggest economy if the cuts are fully implemented. Known as "sequester", the cuts are originally part of a package of measures agreed by politicians to try and force an agreement to cut the budget deficit and will affect everything from air traffic control to defence spending. They should start to bite in the coming weeks and could potentially cause hundreds of thousands of workers to be laid off. On the flip side for investors, any weakness stemming from the cuts is likely to mean central bank stimulus remains firmly in place. "The market is of the view that if there's a fiscal tightening, which causes a significant negative impact on economic prospects and the labour market, then the Fed will have to respond," Morgan Stanley executive director Ian Stannard said. Chinese data showing factory growth cooled in February also dampened the mood on commodity markets.. The potential impact on demand for crude dragged oil prices down almost $1 to a six-week low of $110.3 a barrel. Growth-attuned copper fell to its lowest in more than two months, after a drop of more than 4 percent in February. Platinum, another key metal used heavily in cars and gadgets, hit a seven-week low. "The PMIs were pretty nasty. We got the poor flash HSBC PMI earlier in the week and the real ones are no better. Clearly the situation in China is not as good as people had hoped," said analyst Nic Brown at Natixis in London.