(Updates with closing prices)
By Peter Hobson
LONDON, July 25 (Reuters) - Nickel prices dived more than 3% on Thursday, its blistering rally unwinding as a sharp slowdown in euro zone factory activity undermined the outlook for metals demand.
Benchmark nickel on the London Metal Exchange (LME) ended 3.3% down at $14,075 a tonne.
The stainless steel ingredient hit $15,115, its highest in a year, on July 18 after surging more than 20% in a little more than two weeks.
The rally was driven largely by speculators and not justified by fundamentals showing a largely balanced market, said Capital Economics analyst Ross Strachan.
"Nickel is returning to reality," he said, predicting prices around $11,000 by the end of the year. He said that over the longer term, however, prices would rise as supply tightens.
CENTRAL BANKS: ECB President Mario Draghi said the euro zone's central bank was looking at interest rate cuts, fresh bond buys and new policy guidance to lift persistently low inflation.
The U.S. Federal Reserve, meanwhile, looks poised to cut U.S. rates next week.
Aggressive easing by the two central banks is designed to support economic growth, which should lift metals prices.
GERMANY/EURO ZONE: Underlining a slowdown in global factory activity that has pushed down metals prices, German business morale deteriorated more than expected in July, hitting its lowest since April 2013.
Recession is spreading across the German industrial sector, Ifo economist Klaus Wohlrabe said.
The German data added to a growing pile of numbers suggesting business growth is weakening across the euro zone, hurt by a deepening contraction in manufacturing.
TRADE WAR: Negotiators for China and the United States will meet in Shanghai on Tuesday to continue talks to resolve a trade dispute that has roiled markets and damaged growth in China, the largest metals consumer.
Nearly 70% of global nickel consumption, estimated at 2.4 million tonnes this year, is by stainless steel mills, most of which are in China.
NICKEL STOCKS: Headline nickel stocks in LME-approved warehouses, at about 145,000 tonnes, are the lowest since 2013. MNISTX-TOTAL
YUGUANG LEAD: Henan Yuguang Gold and Lead Co, China's top lead producer, is due to finish maintenance at a lead smelter in Jiyuan, Henan province, on Thursday.
OTHER METALS: LME copper closed 0.1% up at $6,007 a tonne, aluminium ended unchanged at $1,826, zinc fell 0.8% to $2,440, lead was up 1.4% at $2,114.50 and tin slipped 0.4% to $17,850.
Additional reporting by Mai Nguyen and Tom Daly; Editing by Dale Hudson and David Goodman