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* Services 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.
But while the 16-nation bloc's dominant service sector bounced back to better-than-expected growth the manufacturing sector contracted further -- and at a faster pace than had been predicted by analysts.
Economists were nearly unanimous in a view that while the recovery is welcome, the data did not signal a rebound to strong growth but instead suggested a gradual recovery from here.
"All in all, the PMIs confirm that a V-shaped recovery is unlikely in the euro zone. The ECB forecasts something closer to an L-shaped recovery, and these data do little to change their mind," said Marco Valli at UniCredit. "Expect no significant changes in their rhetoric for the next several months."
European Central Bank Governing Council Member Ewald Nowotny echoed this on Wednesday when he was quoted in a newspaper as saying he expected to see an L-shaped recovery.
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 just above expectations.
The services index is now above the 50 mark that divides growth from contraction and should reassure the ECB that its loose monetary policies are working.
Business expectations in the service sector jumped to a three and a half year high this month, significantly up from August and suggesting businesses are also sharing the optimism of economists and financial markets.
However, the euro zone flash manufacturing index missed expectations coming in at 49.0, but this was up from 48.2 in August and its highest reading since June 2008.
But output of the manufacturing sector expanded for the second consecutive month, amd was only slightly down from the 15-month high seen in August.
This upturn was corroborated by data on Wednesday showing euro zone new industrial new orders rose more than expected in July, pointing to a pick up in activity.
The combined rises in the services and manufacturing indexes took the Composite Index to a 16-month high of 50.8, up from 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 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.
"Probably from now on the improvements will be much smaller. If the recovery is to be sustainable we want to see these numbers continue rising but at a pace which is much lower than what we have seen since February," said Silvio Peruzzi at RBS.
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 into expansionary territory for the first time since last September while the manufacturing sector grew for the second month running, both beating expectations.
But it has not all been good news. French consumer spending fell in August, confounding expectations of a rise, while in Germany the ZEW economic think tank's September survey fell short of expectations despite rising to a three-year high.
While the PMIs suggest the economic outlook may be improving, job prospects deteriorated and the pace of layoffs accelerated across the eurozone, according to the survey.
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/David Stamp/Victoria Main)