BEIJING, Aug 1 (Reuters) - - China's manufacturing activity expanded for the first time in 17 months in July as output and new orders increased, a private business survey showed on Monday.

The Caixin/Markit Manufacturing Purchasing Managers' index (PMI) rose to 50.6, beating market expectations of 48.7 and up from 48.6 in June.

The reading breached the 50-point neutral level separating expansion of activity from contraction for the first time since February 2015.

Output hit a two-year high and new orders expanded at the fastest pace in 17 months on the back of stronger domestic demand.

A reading on employment edged up but still showed significant job losses, though official and other private employment surveys have yet to show any material pressures in the labor market, a key area of focus for policymakers.

New export orders also continued to fall, but the pace of contraction was the smallest in eight months even though analysts say headwinds for global trade remain strong.

"The Chinese economy has begun to show signs of stabilizing due to the gradual implementation of proactive fiscal policy," Zhengsheng Zhong, director of macroeconomic analysis at CEBM Group, said in a note accompanying the PMI report.

"But the pressure on economic growth remains, and supportive fiscal and monetary policies must be continued," Zhong said.

China reported last week that industrial profits rose at the fastest pace in three months in June, though gains were concentrated in a few industries including electronics, steel and oil processing.

Second-quarter Chinese economic data was slightly stronger than expected, thanks to a housing boom and government infrastructure spending spree that are boosting demand for materials from cement to steel.

However, private investment growth has shrunk to record lows and financial risks are growing as debt continues to climb, analysts say.

Input costs rose markedly in July after falling in June, the PMI survey showed, and were the highest since April, but companies were able to pass higher costs on to customers.

(Reporting by Elias Glenn; Editing by Richard Borsuk)