The yuan on Monday inched away from a seven-month low against the dollar hit late last week, as a decision by China's central bank to leave a key medium-term policy rate unchanged offset some weaker-than-expected economic data.

The People's Bank of China (PBOC) kept its one-year medium-term lending facility (MLF) rate at 2.50% when such loans are rolled over.

And Financial News, a central bank-backed newspaper, said before the loan operation that China still has room to lower interest rates, but its ability to adjust monetary policy faces internal and external constraints, including the exchange rate.

Xing Zhaopeng, senior China strategist at ANZ, said near-term constraints included the health of commercial banks' balance sheets and depreciation pressure on the yuan.

"USD outflows may peak in the dividend season in the next couple of months, adding depreciation expectations," he wrote in a note to clients.

Xing said there was a chance of a 10-basis-point rate cut in the third quarter of this year if China's PMI remains below 50 over the next couple of months, indicating that manufacturing activity is contracting.

Onshore yuan opened at 7.2535 per dollar and was changing hands at 7.2552 as of midday, 13 pips firmer than a seven-month trough of 7.2565 hit on Friday.

Prior to the market opening, the PBOC set the midpoint rate , around which the yuan is allowed to trade in a 2% band, at 7.1149 per dollar, 2 pips firmer than the previous fix of 7.1151.

But the central bank continued its months-long trend of setting the daily official yuan midpoint fixing at levels much stronger than market forecasts, a practice traders widely interpret as an effort by authorities to keep the yuan stable.

Monday's midpoint was 1,425 pips firmer than a Reuters' estimate of 7.2574 per dollar.

Currency traders said market sentiment was slightly dented by data showing that China's May industrial output lagged expectations with the property sector still weak.

Data on Friday showed new bank lending in China rebounded far less than expected in May and some key money gauges hit record lows, suggesting the world's second-largest economy is still struggling to find firm ground.

By midday, offshore yuan was at 7.2680 yuan per dollar, up about 0.06% in Asian trade. The dollar index, which measures the greenback against a basket of peer currencies, was little changed at 105.540.

(Reporting by Shanghai Newsroom; Editing by Edwina Gibbs)