Private sector business activity shrank in the euro zone for the first time in two years last month as new orders dried up, stoking fears that the economy could be heading back into recession, surveys showed on Wednesday.
A downturn that began in smaller members of the 17-nation bloc has hit the core and survey compiler Markit said the latest figures suggest the region's economy will contract in the fourth quarter unless business and consumer confidence rallies.
We can't rule out the possibility of recession in the coming quarters. Combined with the global slowdown you have the main growth engine of the euro zone economy, Germany, stuttering, said Jeavon Lolay, head of global research at Lloyds Banking Group.
European concerns about flagging activity were mirrored in India's service sector, which also shrank in September as new business tapered off, two days after a global manufacturing survey showed a first drop in output since June 2009 though firms still took on more workers.
Figures due at 1400 GMT from the United States are expected to highlight weakening services growth, though data on Monday showed the manufacturing sector in the world's biggest economy expanded at a faster pace than expected.
Markit's Eurozone Services Purchasing Managers' Index (PMI) fell to 48.8 last month from 51.5 in August, its lowest reading since July 2009 and below an earlier flash reading of 49.1.
It is the first month the index has been below the 50 mark that divides growth from contraction since August 2009.
The composite PMI -- combining the services and manufacturing data published earlier this week and a good guide for economic growth -- fell to 49.1 from 50.7 in August, its lowest level since July 2009 and down from a flash estimate of 49.2.
Economists polled by Reuters last month predicted third and fourth quarter growth of 0.2 percent, but Markit said the result could be even weaker.
A mild output contraction in September sits in stark contrast to the buoyant pace of expansion seen at the start of the year, suggesting that the economy will have stagnated in the third quarter as a whole, Markit's chief economist Chris Williamson said.
Even more disappointing is the steep drop in new business, which suggests that GDP will contract in the fourth quarter unless business and consumer confidence rally in coming weeks.
Ailing stock markets bounced on Wednesday after Europe's finance ministers agreed to shore up euro zone banks against the spreading debt crisis, though contagion fears kept the euro close to a nine-month low against the dollar.
BRITAIN BITTEN, GERMANY STUTTERS
Britain's service sector unexpectedly picked up pace in September, though firms' expectations for the next 12 months are bleak and Britain's economic growth in the second quarter of this year was unexpectedly revised down to 0.1 percent, official data showed on Wednesday.
It is pretty anemic growth. What is happening in Europe is not helping the UK at all, but even fundamentally the UK economy is in a pretty weak spot at the moment, said Marchel Alexandrovich at Jeffries International.
Earlier data from Germany, Europe's largest economy and the backbone of the euro zone's now-stalled recovery, showed activity close to stagnation, while in France the rate of growth slowed to a 26-month low.
Italy's service sector contracted for the fourth month and at a faster pace than expected while Spain's shrank for the third straight month.
But the tough conditions meant companies cut prices charged for the first time in over a year which may moderate some fears at the European Central Bank about above-target inflation.
The ECB has raised its key lending rate twice since April, taking the refi rate to 1.5 percent, in an effort to control inflation that according to flash data was at 3.0 percent in September -- above the central bank's 2 percent target ceiling.
Mounting evidence of a weakening euro area economy prompted some economists to predict an interest rate cut on Thursday from the ECB, although most expect it to wait until the new year before easing policy.
China's services sector offered a chink of light amid the gloom, with the country's HSBC Purchasing Managers' Index rising to 53.0 in September, recovering from an all-time low of 50.6 in August.
(Reporting by Jonathan Cable; Editing by Ross Finley and John Stonestreet)