JOHANNESBURG, July 9 (Reuters) - The South African rand strengthened on Thursday, supported by a rise in gold prices, despite data showing a sharper-than-expected contraction in domestic manufacturing output.

o At 1524 GMT, the rand traded at 16.32 against the dollar, about 0.6% stronger than its previous close.

o The U.S dollar was last down 0.1% against a basket of currencies, while prices of gold, a key South African export rose more than 1%.

o South Africa's manufacturing output fell 4.3% year-on-year in May, after falling by 2.9% year-on-year in April, statistics agency data showed on Thursday.

o Economists polled by Reuters had expected output to decrease 3.2%, while Nedbank economists forecast a 3% contraction.

o "The sector continues to grapple with high domestic cost structures, caused by inefficient and expensive general economic infrastructure, which has systematically eroded the sector's price competitiveness," Nedbank economists said in a research note, adding that manufacturers have also had to absorb higher U.S. tariffs and the recent surge in local fuel prices.

o On the Johannesburg Stock Exchange, the Top-40 index closed up 1.1%, partly boosted by mining stocks.

o South Africa's benchmark 2035 government bond was flat, with the yield at 8.375%.

(Reporting by Nilutpal Timsina and Sfundo Parakozov; Editing by Sharon Singleton)