By Christina Fincher
LONDON, Oct 1 (Reuters) - Britain's manufacturing sector continued to contract modestly last month after employers cut jobs for a 17th straight month and the pace of pick-up in new orders slowed, purchasing managers' data showed on Thursday.
The headline manufacturing purchasing managers' index (PMI)fell to 49.5 last month from 49.7 in August, surprising analysts who had forecast a rise to 50.3.
However, a breakdown of the data from the Chartered Institute of Purchasing and Supply and pollsters Markit suggested some reasons for optimism, after export orders rose at their fastest pace since December 2007.
"The picture is one of consolidation not contraction," said Rob Dobson, senior economist at Markit, the compiler of the survey.
While the figures were disappointing at first glance, the underlying trend remained supportive of a recovery, he argued.
"New orders are rising, sterling is supporting export sales as overseas markets improve and the key orders-inventory ratio remains at an elevated level," he said.
The headline manufacturing index rose above the 50.0 mark that separates contraction from expansion for the first time in over a year in July, but has since fallen back.
Nevertheless, the way PMI is calculated accentuates the pace of change rather than absolute levels so analysts have not been unduly worried by a tailing off in the index after sharp rises earlier this year.
Price pressures remained subdued but there was evidence that the pound's weakness on the foreign exchanges was starting to push up raw material costs.
Average input prices fell in September but at their weakest rate in almost a year and a number of firms reported that rising commodity prices were starting to hit the bottom line. Output prices, meanwhile, fell at their slowest rate in eight months.
The new export orders index rose to 51.5 in September, its highest since December 2007 and only the second above-50 reading since that time.
Although employers continued to reduce headcount, the pace of job shedding was the slowest since June 2008 and mainly centred on large-sized manufacturers, the survey noted.