OTTAWA (Reuters) - Soaring prices for petroleum and coal products helped drive Canadian manufacturing sales up by a steeper-than-expected 2.7 percent in May, the biggest rise since March 2007, Statistics Canada said on Wednesday.

However, on a volume basis, factory sales were up a scant 0.2 percent in the month, Statistics Canada said.

"On balance, this is a strong report on the surface, but stripping out price effects, it is clear that a lot of the strength is simply the result of higher prices," said Charmaine Buskas, senior economics strategist at TD Securities.

"It does, however, provide a modicum of momentum for the second quarter," she said.

Markets had expected a mere 0.5 percent gain in factory sales in April after a revised 2.1 percent increase in April.

Manufacturers built up their inventories at the fastest pace in three years, by 1.3 percent. But the surge in sales growth meant the inventory-to-sales ratio -- a measure of how many months it would take to exhaust inventories at the current sales rate -- dropped to 1.29 from 1.31 in April.

New orders rose 2.7 percent in the month, good news for a sector that has been hammered by the strong Canadian dollar and weakening U.S. market.

Unfilled orders climbed 0.8 percent but breaking with the trend of the past 18 to 21 months, the growth came from industries other than aerospace.

Sales increased in 16 of the 21 industries surveyed, representing 94 percent of all manufacturing sales.

The biggest advance came in petroleum and coal products, up 9.2 percent due to rapidly rising prices. Gains were also robust in primary metals and chemical products.

Statscan said the only notable decrease was in sales by textile product mills.

(Reporting by Louise Egan; Editing by Peter Galloway)

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