(Adds market reaction, analyst comment)
By Jonathan Cable
LONDON, Nov 3 (Reuters) - Euro zone manufacturing activity sank in October below record low levels initially estimated and may have further to fall, as employment shrank faster than at any time since early 2002, a key survey showed on Monday.
The rapid deterioration of conditions facing the sector was, however, accompanied by significant easing of price pressures, which will reinforce the expectation of more hefty cuts in ECB interest rates to shore up the economy.
The Markit Eurozone Purchasing Managers Index for the manufacturing sector slumped to 41.1 -- the lowest in the survey's 11-year history -- from September's 45.0, below the flash estimate and economists' forecasts of 41.3.
The release marks the fifth consecutive month the PMI index has been below the 50 mark that divides growth from contraction but the markets were little moved by the data.
The component indices continued to slide with output, new orders, quantity of purchase and new export orders all slumping to lows not seen in the survey's history, while stocks of finished goods reached a survey high.
"They are very weak and it just confirms that the impact from the appreciation of the exchange rate and more importantly the slowdown in the global economy is really starting to make a hit," said Ben May at Capital Economics.
Companies have been swift to react to the downturn and the employment index nose-dived at the joint second-fastest rate in the survey history to 44.4 from September's 47.0 -- a low not seen since January 2002.
However, a fall in input and output prices to around 3-year lows will cheer the European Central Bank which joined in a coordinated slashing of interest rates by major central banks last month to try to boost floundering economies.
The latest Reuters poll showed the ECB is widely expected to cut rates by a further 50 basis points to 3.25 percent on Thursday to revitalise an economy that is likely already in recession. [ECB/INT]
"The ECB's worries about inflation should be rapidly easing at the moment," May said.
Industrial activity continued to decline across the region with Germany, the bloc's largest economy, posting a decline to 42.9, a low not seen in seven years, while France slumped to 40.6 -- a record low.
Italian and Spanish manufacturing activity also fell to record survey lows at 39.7 and 34.6 respectively.
"It suggests that sentiment in the smaller euro zone countries is really bad. But Germany and France were also revised down so it signals we have a broad based economic downturn and recession in the euro area," said Juergen Michels at Citi.
The 15-nation bloc's dominant service sector is also seen remaining in contraction when data is released on Wednesday, with economists forecasting a fifth month in contraction at 46.9.
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(Editing by Stephen Nisbet and Victoria Main)