The vast U.S. services sector grew at its fastest pace in a year in February, contrasting with signs of recession in Europe, while China cut its annual growth forecast to an eight-year low.

Even so, the U.S. improvement helped global private sector activity grow last month at its fastest pace in a year, according to JP Morgan's Global Total Output index published on Monday.

But that growth has come at a cost, with prices rising at their fastest pace since May 2011, pushed up by escalating oil prices and an associated increase in transportation costs.

While recent indicators have been encouraging, people are still cautious, said Tom Porcelli, chief U.S. economist at RBC Capital Markets. We live in an environment where countries' growth expectations are very much tied together.

US SERVICE SECTOR EXPANSION FASTEST IN A YEAR

American service sector firms, which account for more than two-thirds of U.S. economic activity, grew at their fastest pace since February 2011 last month, according to the Institute for Supply Management.

That extended a recent string of encouraging U.S. economic data, and analysts said it was consistent with U.S. economic expansion of around 2.0 percent a year.

Nearly all the data are signalling underlying strength in the labour market, said Sam Wardwell, investment strategist at Pioneer Investments in Boston. It is looking like the U.S. economy is gathering a positive, self-building momentum.

The picture in Europe was different. Business activity in Spain and Italy slowed sharply, while data also showed growth slowed in Germany, the euro zone's largest economy, and stalled in France.

That rekindled fear that the 17-country euro zone was headed for recession just as monetary policymakers were running out of new ways to boost growth.

Today's surveys don't bode well for the euro zone economy as a whole, as a mild recession is well in the cards, said Annalisa Piazza at Newedge, a Paris-based brokerage.

With interest rates already at a record low 1.0 percent, the European Central Bank has extended more than one trillion euros of cheap, three-year loans to regional banks.

But rather than lending that money out and boosting economic activity, banks appear to be hoarding it. Data shows they have more than 820 billion euros on deposit overnight at the ECB.

The most worrying development is the continued weakness of the southern European measures, said Ben May at Capital Economics.

The ECB is going to be setting policy for the region as a whole and not for individual economies and it is likely that policy is going to be less accommodative than, say, Spain or Italy would choose.

CHINA CUTS GROWTH TARGET, EYES CONSUMERS

Chinese services growth accelerated in February, while the Indian services sector kept expanding at a healthy, if slightly slower, clip.

But Chinese Premier Wen Jiabao cut his country's annual growth target to 7.5 percent, the lowest in eight years, and cited boosting consumer demand as a priority.

That suggested China's recent run of rapid, double-digit economic growth may be winding down.

Asian policymakers, however, have some flexibility.

Should conditions worsen, central banks can reduce interest rates to stimulate economic growth. That is not an option in Europe or the United States, where borrowing costs are at or near zero.

China announced a 50-basis-point cut in its bank reserve requirement ratio to 20.5 percent on February 18, releasing about 400 billion yuan that could be used for lending. It was the second 50-basis-point cut in the reserve ratio in three months.

Investors fear slower Chinese growth would reverberate across the globe. Growth-sensitive assets such as stocks and currencies from countries such as Australia that supply China with raw materials dipped on Monday after Wen's growth forecast.

If China manages to reorient its economy toward consumption and away from exports, that could provide a much-needed market for other countries' goods, something for which China's trading partners have lobbied aggressively.

What's more, the central bank's willingness to allow more fluctuation in the exchange rate, which suggests authorities will tolerate a slightly stronger yuan, should help boost consumer demand.

(Additional reporting by Leah Schnurr in New York and Aileen Wang and Nick Edwards in Beijing; Editing by Padraic Cassidy and Dan Grebler)