WASHINGTON (Reuters) – The US trade deficit with China narrowed to its lowest level in nearly a year in February, while the nation's overall trade gap widened as strengthening domestic demand triggered a surge in imports.

Analysts said yesterday's data may provide China a reason to resist revaluing its yuan currency substantially and suggested the trade deficit could be a small drag on US first-quarter gross domestic product. However, the data was an indication that the economic recovery was gaining momentum.

"The decline in the bilateral trade deficit with China might take a little of the pressure off the Chinese to allow their currency to appreciate against the dollar," said Paul Ashworth, senior US economist at Capital Economics in Toronto.

Chinese President Hu Jintao, attending a nuclear security summit in Washington, told President Barack Obama on Monday that China would not be pushed by external pressure to revalue the yuan and would be guided instead by its own domestic needs.

The closely watched bilateral US trade gap with China narrowed to $16.5 billion in February, the lowest since last March, the Commerce Department said. Imports from China fell 7.2 percent to $23.4 billion, the lowest since May.

China's own monthly data released Saturday showed it ran a $7.24 billion trade deficit in March, the first time its balance had been in the red since April 2004.

Despite the slimmer monthly deficit with Asia's manufacturing giant, President Obama has made clear he wants Beijing to move toward a market-based currency exchange regime.

US lawmakers have threatened to pass legislation imposing US tariffs on Chinese imports if Beijing does not let its currency appreciate.

A jump in imports of consumer goods and other products widened the overall US trade gap in February to $39.7 billion from January's $37.0 billion deficit. Exports grew only marginally.

The 0.2 percent growth in exports, which was overshadowed by a 1.7 percent jump in imports, was still the best showing since the depths of the global financial crisis in October 2008.

Financial markets, which had expected a $38.5 billion trade gap, were little moved by the report.

Cary Leahey, an economist with Decision Economics in New York, said the slightly bigger-than-expected deficit could prompt analysts to ratchet back their estimates for first-quarter US economic growth.

While the economy continues to recover from the worst downturn since the 1930s, small business owners have little confidence in the recovery and are in no rush to hire or expand, a survey released yesterday showed.

The National Federation of Independent Business' monthly index of small business optimism fell 1.2 points in March to 86.8 and was below 90 for the 18th consecutive month.

"The index is still well above its lows reached during the crisis of 2008 but continues to point to a dichotomy in conditions for small businesses and large corporations," said Julia Coronado, an economist at BNP Paribas in New York.

Pointing to strengthening domestic demand, US imports of consumer goods such as pharmaceuticals, electronics, toys and clothing and foreign services such as travel in February were the highest since October 2008. Imports of industrial supplies and materials were the highest since November 2008.