* Service PMI above 50 for first time since May 2008
* Factory PMI highest since June 2008, just shy of 50
* Composite employment index falls
By Jonathan Cable
LONDON, Sept 23 (Reuters) - Euro zone services business grew for the first time in 16 months in September and factory output increased for the second month running, according to surveys on Wednesday that suggested the bloc has pulled out of recession.
Markit's Eurozone Flash Services Purchasing Managers Index (PMI), compiled from surveys of around 2,000 companies, climbed to 50.6 in September from 49.9 in August, its highest level since May 2008 and ahead of expectations for a rise to 50.5.
"It's a welcome sign, a broadening of the upturn. The manufacturing sector had seen the biggest bounceback and has now been joined by services," said Chris Williamson at data provider Markit.
The reading, ahead of the 50.0 mark that divides growth from contraction, should reassure the European Central Bank that its loose monetary policies are working and help cement economists' views that the worst of the recession is now past.
Business expectations in the service sector jumped to a three and a half year high this month at 68.5, significantly up from August's 67.2 and suggesting businesses are also sharing the optimism of economists and financial markets.
The euro zone flash manufacturing index completely missed expectations for 49.7 by coming in at 49.0, but this was up from 48.2 in August and its highest reading since June 2008.
However output in the manufacturing sector expanded for the second consecutive month, with the index coming in at 51.2, slightly down from the 15-month high of 51.3 seen in August.
The combined rises in the services and manufacturing indexes took the Composite Index to a 16-month high of 50.8, up from 50.4 in August but just below the 51.0 predicted by economists.
The euro zone economy contracted 0.1 percent in the second quarter of this year, having shrunk by 2.5 percent in the first quarter -- the sharpest decline on record -- but economists polled by Reuters last week expect it to grow 0.3 percent in the current quarter.
"The general trend is that we have reached stabilisation but it looks like only modest rates of expansion for the rest of the year," Williamson said.
FLASH FLOATING
Separate flash PMIs earlier on Wednesday showed service sector activity grew in the 16-nation bloc's two biggest economies in September after both Germany and France surprised markets with returns to economic growth in the second quarter.
The German services PMI nudged down to 52.2 this month, but remained in expansionary territory, while the manufacturing PMI for the euro zone's biggest economy rose to 49.6 from 49.2, just shy of the break even point.
The French services PMI moved back in to expansionary territory for the first time since last September while the manufacturing sector grew for the second month running, both beating expectations.
However, while the economic outlook may be improving, job prospects are looking grimmer as the composite employment index slipped to 45.1 in September from 46.0 last month as firms continue to slash jobs in an effort to cut costs and stay afloat.
This is the fifteenth month the index has been below 50.0.
"Companies are still in cost cutting mode. They are very much mindful of their cost structure and trying to boost profitability wherever they can. It's a very tough environment out there," Williamson said.
Rises in unemployment may temper any growth as consumers remain cautious about spending. Unemployment was at a 10-year high of 9.5 percent in July and is seen rising higher to 10.8 percent towards the end of next year. (Editing by Andy Bruce)