U.S. manufacturing closed 2005 on a softer note, with a key gauge of factory activity showing slower growth for December, a report from the Institute for Supply Management said on Tuesday.

The Institute for Supply Management said its index of national factory activity fell to 54.2 in December, its lowest since June. That was down from 58.1 in November and short of economists' median forecast for an easing to 57.5.

The index has held above 50, a reading denoting expansion in the sector, for about three years.

"Manufacturing is expanding, but not as broadly as in November," said Gary Thayer, chief economist at A.G. Edwards & Sons. "There was weakness in new orders and employment."

Indeed, the ISM's employment gauge eased to 52.7 from 56.6, while new orders, a signal of future growth, dropped to 55.5 from 59.8. Prices paid declined to 63.0 from 74.0.

Financial markets had a muted reaction to the figures. Stock prices hovered near unchanged and the bond market pared early losses on hopes the data would encourage the Federal Reserve to stop raising interest rates.

The U.S. central bank is slated to meet in January, when most Wall Street investors expect it will raise rates again. Beyond that the monetary outlook is murkier, with many predicting slower economic growth will force the Fed to pause.

The ISM certainly played into that view, and Friday's U.S. jobs report would be the next key piece of the puzzle for economic forecasters.