TOKYO, June 1 (Reuters) - Factory activity in Japan expanded at a slower pace in May as growth in output and new orders eased, and though external demand remains strong worries are growing that domestic coronavirus emergency curbs could derail the economic recovery. Japan extended a state of emergency in Tokyo and other major areas to June 20 last week, as the COVID-19 pandemic shows no signs of abating less than two months before the Summer Olympics open. The world’s third-largest economy shrank at a faster-than-expected pace in the first quarter, mainly due to drops in private consumption and capital expenditure. However, manufacturers have benefited from solid overseas demand, especially from key markets such as China and the United States, where progress in vaccine rollouts have improved the outlook. The final au Jibun Bank Japan Manufacturing Purchasing Managers’ Index (PMI) dropped to a seasonally adjusted 53.0 in May from 53.6 in the previous month, but higher than a 52.5 flash reading. Manufacturing activity has now stayed above the 50.0 threshold that separates contraction from expansion for the fourth straight month. “Japanese firms recorded further increases in both output and new orders in May, as businesses reported improved demand, notably in external markets,” said Usamah Bhatti, economist at IHS Markit, which compiles the survey. The positive external picture is being offset by the impact on businesses and consumption from the new COVID-19 emergency curbs, with Japan’s slow vaccine rollout also keeping policymakers on edge. Price pressures, a major focus around the world, also intensified with the PMI showing input prices rising at the fastest pace in 31 months. The input prices climbed for a 12th month, mainly due to widespread rises in raw material prices, while output prices were largely flat, marking the widest gap between the two in nearly a decade. Data on Monday showed Japan’s industrial output extended gains in April as manufacturers benefited from a recovery in appetite for capital goods, especially in key overseas markets. In the PMI survey, future production - a measure of firms’ growth expectations for the year ahead - was at its highest since July 2017 as a little over a third of firms expected output growth in the coming year thanks to confidence the pandemic would subside. Reporting by Daniel Leussink Editing by Shri Navaratnam Our Standards: The Thomson Reuters Trust Principles.