* U.S. industrial production down, output lowest in 7 years

* Industrial capacity utilization at record low in February

* Gauge of New York state manufacturing hits record low

* Foreigners sell record U.S. securities in January (Updates markets)

By Lucia Mutikani

WASHINGTON, March 16 (Reuters) - U.S. industrial output fell to its lowest level in almost seven years in February and manufacturing in New York state slumped further this month, according to data released on Monday that pointed to a deteriorating economy.

Adding to the economy’s problems, the Treasury said foreigners were net sellers of U.S. securities in January, a worrying development at a time when the government is rolling out a massive spending plan in an effort to break the 14-month-long recession.

The Federal Reserve said industrial production fell 1.4 percent last month, following a 1.9 percent drop in January. It was also worse than market expectations for a 1.1-percent decline.

Output slid 11.2 percent compared with February 2008, with the index at 99.7, the lowest reading since April 2002, the Fed said.

Wall Street stock indexes largely shrugged off the poor data, but surrendered gains after American Express Co AXP.N reported an increase in the number of people battling to make credit card payments. The Dow Jones industrials .DJI edged down 0.10 percent to 7,216 points, ending its four-session winning streak.

Government bond prices also fell, having lost some of their safe-haven appeal to the strong gains in equities for much of the session and the U.S. dollar dropped, with the euro touching a five-week high.

Analysts said the data dashed hopes that the economic recession, which started in December 2007, is close to finding a bottom. That optimism had been fanned by a report last week showing a modest decline in February retail sales.

“Hopes that the U.S. recession is close to ending are not supported by these nasty figures,” said Roger Kubarych, an economist at Unicredit Markets & Investment Banking in New York. “Several more months of declining industrial production are highly probable.”

Industrial capacity utilization dropped to 70.9 February, matching a December 1982 record low for the series, which dates back to 1967, from 71.9 in January, the Fed said.

Manufacturing eased 0.7 percent in February after sliding 2.7 percent in January. The pace of decline slowed due to an increase in the production of motor vehicles and parts after extended plant shutdowns in January, the central bank said.

EXPORTS EVAPORATING

“The manufacturing sector is still declining as firms struggle to pare inventories and come to grips with lower consumer spending, evaporating exports and the full force of a capital spending downturn,” said Daniel Meckstroth, chief economist at the Manufacturers Alliance/MAPI.

“These negative forces are a lot to absorb and it is too early to see a turnaround in the industrial sector. The best we can say is that the industrial side of the economy is declining at a decelerating rate,” he added.

Separately, the New York Federal Reserve’s Empire State factory index showed manufacturing activity in New York State slumped in March, dropping to a record low minus 38.23 in the month from February’s minus 34.65.

One silver lining in the report was the six-month expectations gauge of business conditions, which bounced back into positive territory. But this was coupled with more signs that tight credit conditions were hampering business.

The report’s new orders and shipments indexes also dropped sharply to record lows. Investment was suffering as well, with gauges on expectations of capital spending and technology spending falling to their weakest on record.

Housing, which is at the center of the global economic and financial crisis, remains stuck deep in recession. The NAHB/Wells Fargo Housing Market index was flat at 9 in March, marking a fifth consecutive month of single-digit readings.

There was more bad news for the recession-hit economy, with the Treasury Department saying net overall U.S. capital outflows totaled a record $148.9 billion in January.

Demand for long-maturity securities like bonds, notes and equities shifted from an inflow in December. This comes as the government lays out a $787 billion stimulus plan to halt the economy’s downward spiral.

But there was some comfort in the news that China and Japan -- the largest holders of U.S. securities -- increased their Treasury holdings.

“The reluctance of foreign investors to buy U.S. assets is a concern for the dollar going forward,” said Matthew Strauss, senior currency strategist, at RBC Capital Markets in Toronto.