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By Pedro Nicolaci da Costa
NEW YORK, April 3 (Reuters) - Business activity in the U.S. services sector shrank for a sixth straight month in March as cash-strapped consumers cut back on purchases and the employment outlook deteriorated further.
The Institute for Supply Management said on Friday its non-manufacturing index dropped to 40.8 last month from 41.6 in February.
A measure of employment in the sector fell sharply to 32.3 from 37.3. That reading confirmed what many already knew: the labor market is hurting badly and shows little sign of healing.
"This is where a lot of the problems with the financials and the banking sector are showing up," said Gary Thayer, senior economist at Wachovia Securities in St. Louis, Missouri. "The economy is still very weak and we probably have more adjustment to go through."
U.S. stocks, which had been rallying all week, sold off modestly after the figures. The Dow Jones industrial average <.DJI> was down about 36 points or 0.48 percent.
Labor Department data also out on Friday showed an additional 663,000 job losses during March, with steep upward revisions to the prior two months.
"Unemployment may be a lagging indicator but this jobs report is going to scare the daylights out of the consumer and if they don't spend, this recession may indeed last all year, making the dismal doomsayers forecast for the economy a hard reality," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ.
The services sector represents about 80 percent of U.S. economic activity, including businesses such as banks, airlines, hotels and restaurants.
Economists had forecast a slight rise to 42.0 in the ISM index, where any reading below 50 denotes contraction. (Reporting by Pedro Nicolaci da Costa; Editing by James Dalgleish)