(Adds market reaction, analysts comments, details)
By Jonathan Cable
LONDON, April 3 (Reuters) - The euro zone's dominant service sector contracted sharply again in March, but not as rapidly as in February, offering some hope that the most severe leg of the downturn may have passed, a survey showed on Friday.
The Markit Eurozone Purchasing Managers' Index for the service sector was revised up to 40.9 in March from the 40.1 flash estimate and well above February's 39.2. It was also higher than the 40.1 predicted by economists.
Markets were little moved on the data with the euro
Services business expectations also jumped sharply to a six-month high of 48.6 in March from the 47.5 flash reading and up from 46.1 in February. That was the highest reading since September, when the financial crisis began to intensify.
Among the big-four, France and Italy saw optimism for the year ahead hitting six-month highs while it also picked up to a three-month high in Spain. However, German companies remained downbeat on the twelve-month outlook, growing more pessimistic.
"The business expectations index was revised up significantly. That is a very good reading and that number is approaching the 50 line, that is a very encouraging sign," said Silvio Peruzzo at RBS.
"Overall, pretty optimistic that the euro area economy's recovery is closer and we can start to argue that the recovery will take place by the beginning of next year," he added.
Financial markets also have got a whiff of recovery, with European stock markets rallying sharply along with world shares over the past few weeks.
The Composite Index, combining services and manufacturing activity, moved up to 38.3, ahead of February's 36.2 and considerably ahead of the 37.6 expected and flash estimate.
However, the absolute levels are still very low and that overall, the data suggest that the start of 2009 may prove to be as bad as the 1.5 percent contraction in the final quarter of 2008.
"The improvement in the survey has to be put into perspective. The business activity was still at the second lowest level since the survey started in mid-1998 and points to substantial contraction," said Howard Archer at IHS Global Insight.
Firms across the 16-member euro area continued to slash jobs in an effort to cut costs, driving the Composite employment index to a new low of 40.3, down from February's 40.8.
German automotive cable and wiring supplier Leoni
At the same time, price pressures eased in March at a record pace in the history of the survey, both for inputs and those charged by companies for services.
Annual inflation in the euro zone fell to 0.6 percent in March, far below the ECB's preferred ceiling of 2.0 percent.
The European Central Bank cut interest rates by just 25 basis points on Thursday, less than the half-point economists and financial markets expected but is seen cutting by another 25 basis points to 1.0 percent at its May meeting. [ID:nL2118897] [ECB/INT]
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