euro zone economy
A man walks past a store that buys gold in the Pino Montano working-class neighborhood of the Andalusian capital of Seville November 28, 2012. Reuters

The euro zone's service sector expanded for the first time in 18 months, strengthening hopes that economies in the region are moving close to stabilization, albeit at a modest pace, a Markit survey released on Monday showed.

The final Markit Eurozone Purchasing Managers’ Index, or PMI, rose to 50.5 in July -- a two-year high -- and entered expansion territory for the first time since Jan. 2012. The index had posted a reading of 48.3 in June, while a flash reading for July stood at 49.6. A reading below 50 indicates contraction in business activity.

“The final Output Index reading of 50.5 confirms a welcome return to growth for the Euro zone economy at the start of the third quarter, raising hopes that the region can finally claw its way out of its longest-running recession,” Rob Dobson, a senior economist at Markit, said in a statement.

The final Services Business Activity Index, which gauges the service sector output in the region, moved closer to the expansion zone with a reading of 49.8 in July, marginally up from 49.6 percent showed in flash estimates.

“Granted, the euro area has experienced false dawns before, but the improvements in confidence and other forward looking indicators warrant at least some optimism for the outlook this time around,” Dobson added.

Germany, with solid growth in its manufacturing and service sectors -- 17-month-high and five-month-high respectively -- led growth in the 17-nation bloc in July. Meanwhile, business contraction eased in France, Italy and Spain, as new orders and employment fell at a slower rate across the region, and demand improved in both domestic and foreign markets.

Germany's Composite Output Index posted a reading of 52.1 in July, up from 50.4 in June, while its service sector expanded to 51.3 in July, up from 50.4 in June.

In other euro zone economies: France Composite Output Index stood at 49.1 -- a 17-month high, with the rate of contraction easing from 47.4 in June. In Italy, the Markit/ADACI Business Activity Index rose to 48.7 in July -- a 26-month high, up from 45.8 in June, while the Business Activity Index for Spain posted 48.5 in July, up from 47.8 in June.

“Manufacturing is leading the way out of contraction, with some nations benefitting from improved export demand. The real sparks which will hopefully ignite the recovery are the increasing signs of stabilization in domestic markets,’ Dobson said.

Employment losses were reported for the nineteenth month in July, although the pace of job losses eased to a one-year-low, survey showed.

“The labor market remains the main bugbear of the euro zone, as rising joblessness hurts growth and raises political and social tensions. But even here there was some better news, with the rate of job cutting easing to a 16-month low,” Dobson said.

In the UK, which is not a part of the euro zone, the service sector expanded at its quickest pace in more than six-and-a-half years, posting a reading of 60.2 in July, up from 56.9 in June, as new business continued to register a sharp increase, suggesting an improvement in market conditions, a survey by the Chartered Institute of Purchasing & Supply, or CIPS, and Markit showed.

“The seventh month of sustained, accelerated growth in services was underpinned by improved market conditions both domestically and abroad. Business confidence for UK services is now the highest it has been for 15 months, allowing businesses to expand, develop new products and increase their fees,” David Noble, chief executive officer of CIPS, said in a statement.