(Adds market reaction, analyst comment)
By Jonathan Cable
LONDON, March 24 (Reuters) - Key gauges of euro zone services and manufacturing activity suggested the economic contraction unexpectedly eased a little in March, but firms continued to slash jobs and prices.
Markit said on Tuesday that its Flash Eurozone Purchasing Managers Index for the dominant service sector rose to 40.1 in March, still well below the 50 mark where growth begins but ahead of February's 39.2 and considerably above expectations for 39.0.
"After some volatility at the beginning of the year, the eurozone PMIs seem to have found a bottom around a very depressed level while -- unsurprisingly -- labour market and price indices continue hitting fresh lows," said Marco Valli at UniCredit MIB.
The euro pared some of its losses after the data were released while European shares traded only modestly up even after an explosive rally on Wall Street on Monday.
Service sector firms, ranging from banks to restaurants, were a little less pessimistic about the outlook with an index measuring expectations for business in 12 months' time rising to 47.5 from February's 46.1.
Factories in the euro zone also saw a slowing in the rate of decline with the flash Manufacturing PMI rising to 34.0 from 33.5 in February and above the 33.4 expected by economists.
The fall in new manufacturing orders was also a little less steep, with that index rising to 30.7 from 28.2 in February, while the stocks of finished goods index slumped to a record low, suggesting firms were managing to shift old stock.
Even so, companies battling against sinking demand and banks' reluctance to lend have been forced to slash jobs to cut costs and stay afloat.
The Composite employment index, which measures employment broadly in the euro area, dropped to 40.3, a record low for the 10-year-old index, from 40.8 in February.
"There are companies reducing hours and cutting shifts and alongside this the worrying factor is that the rate of decline is still gathering pace," said Chris Williamson at data compiler Markit.
TROUBLED TIMES
However, the upturn in both sectors took the combined Composite index to 37.6 from February's 36.2 and above the 36.0 which had been predicted, as global efforts to combat recession by boosting government spending and cutting borrowing costs should help eventually.
"The fact they have stabilised in March shows we have probably seen the lowest point for growth, but activity will continue to contract through 2009 and into 2010," said Dominic Bryant at BNP Paribas.
The European Central Bank has been forced to hack away at interest rates as it battles to breathe life into an economy that Reuters polls predict will contract 2.6 percent this year and it is widely expected to cut again later this week.
The euro zone economy shrank 1.5 percent in the last three months of 2008 and Williamson said it was on course to fare as badly or possibly worse in the current quarter.
Expectations of another rate cut will be reinforced by data showing input price pressures across the bloc fell to record lows and companies passed on their savings to customers, slashing their prices at a record pace.
Earlier data showed the pace of manufacturing and service sector decline eased a touch in Germany, the 16-nation bloc's largest economy, and in France too the downward pressure eased on both sectors.
(Editing by Ruth Pitchford/David Stamp)