* Euro zone services, factory and composite PMIs all beat forecasts
* Services new business index at seven month high
* Manufacturing employment index at five month high
* Composite input prices index rises, highest since January
By Jonathan Cable
LONDON, May 21 (Reuters) - The euro zone's services and manufacturing sectors contracted less than expected in May as firms saw the pace of decline in new orders ease, surveys showed on Thursday.
Markit's Eurozone Flash Services Purchasing Managers Index (PMI) rose to 44.7 in May from 43.8 last month, beating the consensus estimate of 44.5. That was the third month in a row it has picked up and took it to its highest level since October.
The survey, covering banks to hotels, showed activity was still considerably below the 50.0 mark that divides growth from contraction, and comes on the heels of other data from across Europe indicating the worst of a severe recession may be over.
"Historically the figures are consistent with GDP falling in the last two months at a quarterly rate of 0.5 percent. If that is the case there will be a steep easing in the rate of decline," Chris Williamson at data provider Markit said.
Data released on Friday showed the euro zone's economy shrank a record 2.5 percent quarter-on-quarter in the first three months of the year, coming on the back of a 1.6 percent quarterly contraction at the end of 2008.
Economists believe the worst has passed and see the economy returning to growth in the last three months of this year.
Business expectations in the euro zone's service sector rose to a 13-month high while the new business index rose to just 41.9 from 40.2, showing order levels are still declining, albeit at a slower pace.
"There is a broad based improvement in confidence and that is based on the stimulus packages and low interest rates," Williamson said.
The European Central Bank has slashed interest rates to just 1.0 percent and announced plans to buy up to 60 billion euros of covered bonds.
An upturn was seen in the euro zone's two biggest economies as service sector activity in Germany contracted at its slowest pace since December while in France the PMI climbed to an eight month high of 47.6.
Morale in Germany, the 16-nation bloc's largest economy, hit a three-year high this month, according to the monthly ZEW poll on economic sentiment, while other recent sentiment indicators have also suggested the economy has bottomed out.
However, while a separate ZEW survey on current conditions in Germany fell to its weakest level in six years, the business expectations index in the country's PMI survey moved over 50.0 for the first time in over a year, recording a level not seen since May 2007.
COMPOSITE CLIMBS
The Flash Manufacturing PMI rose to a seven-month high of 40.5 from 36.8 in April, far outstripping the consensus of 38.4. The combined rises took the Composite index to an eight month high of 43.9 from 41.1 in April and beating the median forecast of 42.3. Stocks of finished goods sank to a new low, despite a slowdown in the decline of both new domestic and export orders, as firms ran down existing products.
The rises followed earlier releases showing Germany's manufacturing index rose to 39.1 in May from 35.4 and France saw its index rise to 43.1 from 40.1.
However, employment levels in the manufacturing sector continued to decline, although at a slower pace, with the index rising to a five-month high of 37.8 from 34.6 as firms slashed more jobs in a bid to cut costs.
Unemployment in the euro zone reached 8.9 percent in March and German commercial vehicle maker Daimler said earlier this month it plans to cut 2,300 jobs.
Inflationary pressures continued to ease but the input prices index moved to a five-month high of 42.5 from last month's 40.6.
Inflation in the euro zone was just 0.6 percent in April, considerably below the European Central Bank's two percent target ceiling.