Growth in Britain's dominant services sector eased last month, a survey showed on Thursday, while manufacturers slammed the brakes on production, adding to signs that the country may slip back into recession.

The Markit/CIPS Purchasing Managers' Index (PMI) for the service sector slipped to 51.3 in October from 52.9 in September, falling short of expectations for a dip to 52.0 and edging closer to the 50 mark that separates growth from contraction.

The manufacturing sector, once the lone bright spot in the country's lacklustre recovery, contracted at its fastest pace in more than two years as new orders plummeted, PMI surveys showed on Tuesday.

(The services PMI) is signalling growth but, as we all feared, at a fairly anaemic pace. Not quite there (recession) but there has clearly over the last six months or so been a distinct loss of momentum, said Ross Walker, UK economist at RBS.

It's just about keeping its head above water but there's going to be a sterner test I think in the next couple of months.

Markit said a likely worsening of the PMIs in November or December would mean a contraction in fourth-quarter GDP of around 0.1-0.2 percent.

However, the poll also showed a marked improvement in business confidence as service sector firms were at their most optimistic since May. Positive pipelines, the introduction of new products, improved company efficiency and increased levels of marketing should all support growth of activity and new business over the coming year, they said.

Sterling hardly moved after the UK services data while a volatile FTSE 100 showed little reaction with the blue chip index flat, having swung in a one hundred point range in the first 1-1/2 hours of trading.

Data released on Tuesday showed the British economy grew 0.5 percent last quarter, its strongest showing in two years, but economists see weaker growth ahead and gave a median one-in-three chance the country will head into another recession in the next 12 months.

There is a near 50 percent chance of another recession, think tank NIESR said in a report published earlier on Thursday, adding that if European leaders fail to resolve the raging euro zone debt crisis the chances rose to 70 percent.

Leaders announced a deal last week to help reduce Greece's huge debts, boost the region's bailout fund and strengthen banks but a shock call from Athens this week for a referendum stoked fears that the breakthrough would crumble.

The euro zone is one of Britain's major trading partners and

data on Friday is expected to show the euro zone's services sector contracted for a third month. In a more positive sign for the global economy, the services sector in the United States is expected to have seen a bounce when figures are released later on Thursday.

The British government has come under pressure to ease back on its austerity plans and introduce measures to boost growth. Chancellor George Osborne acknowledged on Tuesday that the country faced a rough ride but he reiterated his commitment to erase a record budget deficit of nearly 10 percent of GDP.


Strong competition in the services sector, which accounts for around two-thirds of economic activity, forced firms to cut their fees for the first time since September 2010 -- the prices charged index fell to 48.6 last month from 50.0 -- even as input prices rose.

Inflation rose to a three-year high in September of 5.2 percent, well above the Bank of England's 2 percent target, but is seen easing over coming quarters.

Despite inflation so far above target, the Bank has already launched a second round of quantitative easing, pumping additional money into the economy, and policymakers have warned the country risks slipping into another recession.

The Bank decision to add 75 billion pounds to its asset purchases programme in early October is also expected to be relatively supportive, or at least reduce the risks of a recessionary path in all the major industries, said Annalisa Piazza at Newedge Strategy.

But, in further signs of trouble ahead, service sector firms reduced their workforce last month, as did manufacturers, suggesting unemployment was set to rise above the 17-year high seen in the three months to August.

Despite the gloomy data, service sector firms in the poll, which range from storage and communication businesses to hotels and restaurants, were at their most optimistic since May.

A welcome improvement in business confidence to the highest since May gives reason to believe that a double-dip recession is by no means a certainty, Chris Williamson at Markit said.

Much will depend on whether business sentiment can hold up in the face of headwinds such as the ongoing financial crisis in Europe and deficit-fighting austerity measures in the home market.

(Editing by Susan Fenton)