By Daniel Flynn
ROME, Sept 3 (Reuters) - Italy's service sector contracted for a 21st straight month in August but the rate of decline was the slowest in 11 months due in part to a strong recovery in business expectations, data showed on Thursday.
The Markit/ADACI Purchasing Managers' Index, spanning companies from hotels to insurance brokers, rose to 46.4 from 44.5 in July, its highest level since the collapse of Lehman Brothers in September 2008 accelerated the financial crisis.
The index has languished below the 50 mark that separates growth from contraction since November 2007, but the latest figure topped the median forecast of 46.0 in a Reuters poll of analysts. The index hit an all-time low of 37.9 in February.
Despite a continued downturn in current operating conditions, optimism over future business activity hit its highest level since July 2006, Markit said. The sub-index jumped to 75.4 from 70.2 the previous month.
"Italian services companies appear confident that the worst phase of the recession has passed," said Andrew Self, economist at Markit, who nonetheless urged caution.
Self said the smoothness of Italy's recovery was called into question by an unexpected fall in manufacturing activity for August. A PMI survey published on Tuesday showed factory activity falling more rapidly for the first time since March.
The euro zone's third largest economy has been in recession since spring last year and is widely forecast to shrink at least 5 percent this year, after a 1.0 percent contraction in 2008.
While larger neighbours Germany and France both showed positive growth in the second quarter, Italy's economy contracted by 0.5 percent.
Thursday's data showed new business in Italy's service sector continued to fall in August due to weak consumer demand, but at its weakest pace in 11 months.
Companies reduced their workforce at the slowest rate since October. The steepest job cuts came in the post and telecommunications sector, while financial intermediation was least affected.
Service companies reported a mild monthly rise in the cost of inputs due to higher wage costs. Intensified competition for contracts, nonetheless, forced service providers to cut prices for an 11th straight month, with post and telecoms worst hit.
Italy has had one of western Europe's lowest rates of growth for around a decade, and is on track to post two consecutive years of falling gross domestic product for the first time in its post-war history.
Measures of consumer and business confidence have shown a clear improvement in recent months, with Italy's ISAE institute saying on Tuesday that business morale in August hit a 10-month high.
(Reporting by Daniel Flynn; Editing by Victoria Main)