Business activity in European countries fell in March, but the pace slowed as efforts to revive economies took hold and pessimism ebbed after a plan by world leaders to kick start a global recovery.

A test of the optimism that followed Thursday's agreement by G20 leaders on a $1.1 trillion deal to combat the crisis will come when U.S. unemployment data for March is released later on Friday.

The United States probably continued to bleed jobs at a rapid rate in March, likely pushing up the jobless rate to 8.5 percent.

White House spokesman Robert Gibbs said on Friday the United States was set to report the economy suffered additional severe job cuts in March.

But economists have started to see some green shoots in the U.S. economy after a bleak few months, and the labor market, a lagging indicator, is likely to be one of the last places where an improvement is seen.

In the 16-country euro area, companies also continued to slash jobs in an effort to cut costs, driving the Markit Eurozone Composite PMI employment index to a new low of 40.3, down from February's 40.8.

The euro zone's dominant service sector contracted sharply again in March, but not as rapidly as in February. [nL3670963]

With the rate of decline easing in the final month of Q1, and confidence improving to the highest since Lehman's collapse, there are signs that we may be over the worst, said Chris Williamson at data provider Markit.


But Italian service sector activity stayed close to record lows in March, with employment in the euro zone's third-largest economy falling the fastest in over 11 years.

Yet the expectations index jumped to 61.1 from 54.9, showing an increasing proportion of managers thought business would be better in 12 months' time.

The belief that the economic downturn is beginning to stabilize, coupled with signs of improving credit markets, resulted in a marked rise in business sentiment during March. Optimism was at its highest for six months, Markit said.

Financial markets have also got a whiff of recovery with European stock markets rallying sharply along with world shares over the past few weeks.

On Friday, European shares dipped then turned positive after Thursday's 4.9 percent rise that followed the G20 leaders clinching the $1.1 trillion deal.

Asian stocks rose for a fourth straight day as perceptions of a coordinated global policy response grew after the G20 summit.

The leaders of the world's richest and biggest economies, which account for more than 80 percent of world trade, also agreed to tighten rules on tax havens, hedge funds and credit rating agencies.

The measures agreed to would raise world output by 4 percent by the end of 2010, they said, although they were hazy on the amount of stimulus spending to date, with estimates ranging between $2 trillion and $5 trillion.

World Trade Organisation head Pascal Lamy welcomed G20 consensus to avoid protectionism and an agreement to support global trade flow.

It is a very positive response, Lamy said. Implementation now is something we will be watching.

(Additional reporting by Reuters bureaux around the world; Writing by Sue Thomas; Editing by James Jukwey)