* Services PMI rose to 46.4 in Sept from 45.3 in August
* Slowest rate of sector contraction since decline started
* Business sentiment falls to lowest point since June
MADRID, Oct 5 (Reuters) - Spain's service sector contracted in September at the slowest rate since its decline started in January 2008, although business sentiment fell to its lowest point in three months, according to a survey on Monday.
The headline Markit Purchasing Manager's Index rose to 46.4 in September from 45.3 a month earlier, its 21st consecutive monthly contraction but well above the low of 28.2 reached last November. Levels below 50 signify contraction and those above that growth.
Signs the Spanish service sector slowdown may be coming to an end should be viewed with caution, Markit economist Andrew Harker warned.
"The Spanish service sector remains some way from recovery, despite the latest fall in business activity being the slowest in the current period of contraction," Harker said.
Underlying structural problems within the Spanish economy, notably the country's reliance on housing construction during the boom years, are expected to continue to make a return to growth difficult.
Spain's economy would be one of the slowest in Europe to emerge from recession, the International Monetary Fund said Oct. 1. The government forecasts positive quarter-on-quarter growth to return in the second quarter, 2010.
"It would be premature to talk of recovery while the data remain at levels unprecedented prior to the downturn," said Harker.
Expectations among those surveyed by Markit fell for the first time since May, with around 18 percent of respondents expecting business activity to decrease due to worsening economic conditions.
New business contracted for the 23rd consecutive month due to low demand, which has fallen sharply since the beginning of the crisis as consumers cut back spending due to restrictive credit conditions and soaring unemployment.
Declining demand was also a key factor in a new contraction in employment conditions, Markit said.
While the rate of jobs cuts in September was the lowest since October 2008, the Spanish service sector continued to register lay offs for the 19th consecutive month.
Spanish unemployment stood at 18.9 percent in August, according to official European Union data, more than double the average in the 27-country region.
Strong competition amongst service providers vying for shrinking business opportunities and discounts offered by providers to boost demand hit output prices in September, which have declined continuously since August 2008. (Reporting by Paul Day; Editing by Andy Bruce)