Growth in the U.S. service sector was steady in September and private hiring picked up, suggesting the economy was not yet slipping into recession.

Optimism over Wednesday's data, however, was soured somewhat by news that employers last month planned to lay off the most workers in more than two years. The bulk of the intended cutbacks, however, are in the U.S. military and at Bank of America and are not directly related to recent weakness in the economy.

The economy is not tipping into another recession but is instead stuck in the mud at a below-potential rate of growth, said Omair Sharif, an economist at RBS in Stamford, Connecticut.

The Institute for Supply Management said its services index ebbed to 53.0 last month from 53.3 in August. A reading above 50 indicates expansion in the sector. Details of the report were mixed, with orders rising but employment falling to its lowest level in nearly 1-1/2 years.

The drop in services employment, was however, at odds with a separate report from payrolls processor ADP showing overall private payrolls rose by 91,000, above economists' expectations for an increase of 75,000.

ADP said most of the gains, which exceeded August's count of 89,000, came from the service sector.

Economists weighing the two reports said it appeared there had been mild improvement in the labor market last month after the economy failed to add any jobs in August.

The government will release its closely watched national employment report for September on Friday. Nonfarm employment likely rose 60,000 as striking Verizon Communications workers return to payrolls, according to a Reuters survey, after being flat in August.

The ADP report is generally not an accurate predictor of the Labor Department payroll data, said Daniel Silver, an economist at JP Morgan in New York. However, the report is consistent with other recent indicators that have signaled recent improvement in the labor market.

MUDDLING ALONG

Investors on Wall Street were relieved the data had shown no further deterioration in the economy and bought stocks. Prices for the U.S. government debt fell, while the dollar weakened against a basket of currencies.

While the economy muddles along after a bleak August, the risk of a recession remains high as the debt crisis in Europe deepens. Some economists are predicting a downturn in the euro, which drag on the U.S. economy down, analysts warn.

Private sector business activity shrank in the euro zone for the first time in two years last month as new orders dried up, surveys showed on Wednesday.

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.

The U.S. economy grew at a 1.3 percent annual pace in the second quarter and data ranging from business spending to motor vehicle sales suggest that output could top a 2 percent rate in the July-September period.

The economy needs to grow by at least an annual rate of 2.5 percent and payrolls expand 150,000 a month on a sustained basis just to keep the jobless rate, now 9.1 percent, from rising further.

There is modest growth in the economy, we are growing at a rate that's too slow for the unemployment rate to fall, said Mark Vitner, a senior economist at Wells Fargo Securities in Charlotte, North Carolina.

Last month, employers announced 115,730 planned job cuts, more than double August's total of 51,114, according to the report from consultants Challenger, Gray & Christmas, Inc.

The figure was the highest since April 2009.

It is important to keep in mind that 80,000 cuts, or nearly 70 percent of last month's total, came from just two organizations: Bank of America and the United States Army, said John Challenger, chief executive officer of Challenger, Gray & Christmas.

Neither of these cuts is directly related to recent softness in the economy.

(Editing by James Dalgleish)

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