* Services PMI highest since August 2007
* Surveys show prices rising sharply in euro zone
* Composite PMI suggests Q1 growth of 0.8 percent
By Jonathan Cable
LONDON, March 24 (Reuters) - The recovery in the euro zone's dominant service sector accelerated slightly this month and manufacturing saw solid growth, but both faced further pressure from surging prices, PMI surveys showed on Thursday.
The Flash Markit Eurozone Services Purchasing Managers' Index (PMI) nudged up to 56.9 in March from 56.8 the previous month, its highest reading since August 2007 and confounding expectations for a dip to 56.4.
This is the 19th month the index, which measures the activities of companies ranging from banks to hotels, has been above the 50 mark that divides growth from contraction.
The flash manufacturing PMI fell to 57.7 this month from 59.0 in February, missing expectations for 58.4, while the output index dropped to 58.9 from last month's 10-year high of 61.4.
"You expect to see some dips and dives when they are at these sorts of heights so we are not particularly worried about the downturn in the manufacturing index, it's still at levels suggesting strong growth," said Chris Williamson at Markit.
Earlier data from Germany showed a similar pattern while France saw accelerating growth across the board.
The euro zone composite PMI, a broader measure of the private sector which combines the services and manufacturing data, dropped to 57.5 from February's near five-year high of 58.2.
The composite index is often used as a guide to growth and Markit said it pointed towards a first quarter economic expansion of 0.8 percent, with upside potential.
Analysts polled by Reuters two weeks ago predicted first quarter growth of just 0.5 percent for the euro zone economy.
PRICE PRESSURES
The input price index for the services sector rose to 60.6 this month from February's 58.4, its highest level since August 2008, as oil prices have soared with tensions in the Middle East and North Africa heightening supply fears.
The manufacturing sector's output price index rose to 61.4 from February's 60.8, the highest since the survey began tracking the index in November 2002, suggesting producers were able to pass on the increase in input prices.
"These are very worrying levels. It's feeding through the supply chain, and it has originated from oil and food price rises. Producers and suppliers are trying to pass those higher energy costs on and they are getting increasingly successful at doing that," Williamson said. Official data showed prices rose 2.4 percent year-on-year in the bloc last month, bolstering expectations that the European Central Bank will raise interest rates when it meets in April.
The ECB wants to keep inflation below, but close to 2 percent and signalled earlier in March that it may raise interest rates in April, saying that it had to prevent second-round effects from the oil price shock.
Economists earlier this month adopted a new consensus, forecasting an April rate rise, having earlier forecast interest rates would not rise from their record low of 1.0 percent until the fourth quarter of this year.
Companies across the 17-nation bloc continued to take on workers this month, albeit at a slighter slower pace than in February, with the composite employment index slipping to 53.1 from a three-year high of 53.3 last month.
Euro zone unemployment fell below 10 percent in January for the first time since December 2009, coming in at 9.9 percent. (Reporting by Jonathan Cable; Editing by Susan Fenton)