MADRID, Aug 5 (Reuters) - Spain's services sector fell into more severe contraction in July, with activity and new orders declining at faster rates than the month before, according to the Markit Purchasing Managers' index.
The indicator dropped to 40.8 from 41.2 in June, its 19th consecutive monthly fall although well above the low of 28.2 touched last November.
A Reuters survey of five analysts had predicted the index would improve slightly to 42.5, but the headline index was dragged down by another reduction in new business which dropped to 40.3 from 41.7 in June.
"Following the stabilisation of manufacturing output signalled by July's PMI data, the services figures will be a blow to anyone hoping for a quick economic recovery in Spain," said Andrew Harker, economist at Markit.
The manufacturing PMI survey released on Monday showed the index rising to 47.3, close to the 50-point level dividing contraction from growth.
But five of the six broad sectors monitored for the services PMI showed activity contractions in July.
"With rates of decline of activity, new business and employment all accelerating during July, the data highlights that there will certainly be twists and turns on the road to recovery," Harker said.
But, while new services business fell further in July as clients delayed purchasing decisions, Spanish service providers became more optimistic, with sentiment hitting its most positive level since August 2007 on expectations that the economy will begin to improve next year.
Meanwhile, firms shed jobs at the fastest pace since March, after three consecutive months of slight easing. They also cut prices for the 12th month in a row and profitability fell.
Economists think Spain's economy, the fourth-largest in the euro zone, could take longer to recover than many others due to its eroded productivity and the lack of a motor of growth to replace the construction industry which fed a decade-long boom.
Businesses say the country's labour market must be reformed if strong growth is to return, but the Socialist government has refused to cut workers' benefits. Meanwhile, unemployment has hit 17.9 percent, according to government data, about double pre-crisis levels.
(Reporting by Jason Webb; editing by Stephen Nisbet)