(Updates with comment, market reaction)
* Services and composite PMIs at 15-month highs
* Factory PMI at 14-month high
* Factory output expands for first time since May 2008
By Jonathan Cable
LONDON, Aug 21 (Reuters) - The decline in the euro zone's dominant services sector almost came to a halt in August and businesses' expectations for the future soared to their highest level in more than two years, a key survey showed on Friday.
Data also showed manufacturing activity contracted at a far slower pace than expected and output rose for the first time in 15 months, suggesting that the broad euro zone economy has stopped contracting after its worst recession on record.
Markit's Eurozone Flash Services Purchasing Managers Index (PMI), compiled from surveys of around 2,000 companies, climbed to 49.5 in August from 45.7 in July, its highest since May last year and smashing expectations for a rise to 46.5.
Euro zone government bond futures fell to a session low after the figures after getting knocked down earlier on the companion German PMI data, which also came in above expectations.
The euro touched a one-week high against the dollar.
"The further sharp rise in the euro-zone composite PMI index suggests that underlying economic conditions continued to improve markedly in August," said Ben May at Capital Economics.
"The upshot is that the worst of the downturn certainly now appears to be over and the economy might even be beginning to expand again."
Services companies were at their most optimistic since April 2007, before the financial crisis began, with the business expectations index leaping to 66.5 from 61.4 in July.
The combined rises in the services and manufacturing indexes took the Composite Index to a 15-month high of 50.0, right at the dividing line between contraction and growth, up sharply from 47.0 in July and shattering expectations for 48.1.
The euro zone flash manufacturing PMI was also comfortably ahead of economists' expectations for 47.5, climbing to a 14-month high of 47.9 in August from 46.3 last month.
The output index for the sector, which is used to calculate the composite PMI, rose above 50 for the first time since May 2008, moving up to 50.8 from 49.4 in July.
The euro zone economy contracted 0.1 percent in the second quarter of this year, having shrunk by 2.5 percent in the first quarter -- the sharpest decline on record -- but economists polled by Reuters this week expect it to grow by 0.2 percent in the current quarter. [ECILT/EU]
BIG RISES IN GERMANY AND FRANCE
Separate flash PMIs earlier on Friday suggested the euro zone's two biggest economies are also on the mend, coming after Germany and France achieved a shock return to economic growth in the second quarter of the year.
Services activity in the bloc's biggest economy, Germany, leapt into expansion, with that PMI at 54.1 this month. The German manufacturing PMI rose to 49.0 from 45.7 in July.
The French services index also moved higher than expected to 48.9 from 45.5 in July while the country's manufacturing sector expanded for the first time since May 2008.
The figures suggest that aggressive monetary easing from the European Central Bank, along with a strong rebound in Asia's economies, may be bearing fruit.
The ECB has slashed interest rates to a record low of 1.0 percent and has provided hundreds of billions of euros worth of temporary cash to banks in its battle to shrug off a financial crisis and revitalise the battered economy.
But it hasn't yet had any effect in stopping Europeans from losing jobs.
The composite employment index rose to 45.8 this month from 42.7 in July, a 10-month high, but indicates firms are still slashing payrolls as they battle to cut costs and stay afloat.
Deutsche Telekom's
"Rising job losses and the continued need for widespread and deep price discounting remain concerns looking ahead as a sustained recovery in demand is necessary if the emerging rebound is to gain traction," Dobson said. -Detailed PMI data are only available under licence from Markit and customers need to apply to Markit for a licence. To subscribe to the full data, click on the link below:
http://www.markit.com/information/register/reuters-pmi-subscriptions
For further information, please phone Markit on +44 20 7260 2454 or email economics@markit.com (Editing by Mike Peacock)