Private sector activity in the euro zone shrank at its fastest pace in 28 months in October as the debt crisis sapped new business and soured sentiment in an economy looking like it is heading into a slump, survey data showed on Friday.

Markit's composite Purchasing Managers' Index for the single currency area sank to 46.5, down from 49.1 in September and below an earlier flash estimate of 47.2.

(This) is the kind of level which frankly is pointing to recession, said Peter Dixon, economist at Commerzbank.

We knew it would it bad but clearly the fact it deteriorated more rapidly than we anticipated indicates the economy is losing momentum at a faster pace. Obviously the euro zone debt crisis is leaving its imprint on the real economy.

The unresolved crisis, which has hammered businesses across the euro zone, has entered a dangerous new phase with Greek Prime Minister George Papandreou facing a tight confidence vote later on Friday after his risky plan for a referendum on an EU/IMF bailout backfired spectacularly.

In a bid to support the ailing economy, the European Central Bank (ECB) surprised markets with a 25 basis point cut on Thursday at its first policy meeting led by Mario Draghi. Economists gave a 50-50 chance of another cut in December, according to a Reuters poll.

SERVICES SLUMP

Markit's Services PMI also fell sharply, to 46.4 in October from 48.8 in September, its lowest reading since July 2009 and again markedly lower than an earlier flash reading of 47.2.

It was the biggest downward revision from the flash reading since November 2008, when Europe was plunging into the darkest phase of the financial crisis.

The index stayed below 50 for the second month running, a level that divides growth from contraction, and survey complier Markit said conditions are unlikely to improve over the next few months as the threat of an imminent recession takes hold.

The final PMI was even weaker than the earlier flash estimate, and suggests that the euro area contracted at a worrying pace at the start of the final quarter, said Chris Williamson, chief economists at Markit.

The survey points to growth falling at a quarterly rate of 0.5 percent and suggested it was highly probable the economy could contract in the fourth quarter.

Service providers, who range from hotels to hairdressers, post and telecom, struggled in October. The new business index tumbled to 45.3 from 47.1, and hiring stagnated for the first time since April 2010.

The gloomy economic outlook hurt business confidence with the index declining to a two-and-a-half year low.

Country-specific data showed services activity contracting in France, Spain and Italy, while Germany and Ireland saw only modest growth.

Activity in services firms also lost steam in major Asian economies and slowed to a crawl in Britain, suggesting the global economy is weakening as the euro zone crisis rages on, key surveys released on Thursday showed.

The same trend continued in the U.S. services sector, which slowed modestly to its lowest level in three months.

Growth in German services and factories eased to its weakest during the current 27-month period of expansion after the slight rebound in services activity was negated by the first drop in manufacturing output since June 2009.

The performances of France and Italy deteriorated sharply and Spain stayed stuck in a contraction phase with output falling sharply in both services and factories.

Italy, under fierce pressure from financial markets and European peers, has agreed to have the IMF and the EU monitor its progress with long delayed economic and social reforms, senior EU sources said on Friday.

(Editing by John Stonestreet)

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