By Christina Fincher
LONDON, July 3 (Reuters) - Britain's dominant services sector expanded for a second month in June but the pace of recovery slowed as new business contracted and firms stepped up the pace of job cuts, a monthly survey showed on Friday. The headline PMI index eased to 51.6 from 51.7, confounding expectations for an improvement to 52.0.
Last month's leap above the 50-mark that denotes growth raised hopes that Britain may be one of the first major economies to emerge from recession.
While a pause in momentum may not be a huge setback given the pace of improvement in recent months, it will play into policymakers' fears that a sustained recovery is far from assured.
"The sideways movement in the headline business activity index in part reflects some consolidation," said Paul Smith, senior economist at Markit.
"Nonetheless, the underlying data indicate that the business climate remains fragile with tight lending conditions and rising unemployment remaining key threats to continued service sector recovery."
The Bank of England meets to discuss monetary policy next week but markets do not expect any rise in interest rates until the end of the year at the earliest.
Neither does the Bank appear in any rush to reverse its policy of pumping money into the economy to boost demand. Indeed, the current debate is whether the Bank will raise its target for quantitative easing with many economists expecting an increase to 150 billion pounds to be announced as early as next week.
FRAGILE RECOVERY
Britain's economy shrank at its fastest pace in more than 50 years in the first three months of this year but better data in recent months has generated hope of a return to growth in either the second or third quarters of this year.
Nevertheless, economists have also cautioned that much of the recent pick-up in activity could be due to re-stocking after firms ran down inventories last year.
Heightening such concerns, the new business index fell to 49.7 in June from 51.8 in May -- the first decline in the index since November.
"Anecdotal evidence from the survey panel indicated that economic conditions remained difficult overall, with clients reluctant to commit to expenditure given ongoing uncertainty," the survey noted.
In a bid to support sales, average output prices were cut for an eighth consecutive month in June. In contrast, average input prices picked up slightly on the back of higher fuel costs.
Despite the fall in new business and further job losses, business confidence continued to rise in June with the expectations index hitting its highest level in almost two years.